I got to read MS15/2.3 last night. It was a good read. It’s long and detailed but it’s key findings and remedies are short enough to be listed here.
There are the remedies that need a little more consultation;-
- that the Treasury considers bringing investment consultants into the regulatory perimeter
- that DWP to remove barriers to pension scheme consolidation and pooling
- that both industry and investor representatives agree a standardised disclosure of costs and charges to institutional investors,
- that an independent chair convene relevant stakeholders to develop this further
- working with stakeholders to consider whether any other actions are necessary.
- launching a market study into investment platforms
There are remedies that the FCA can just get on with
- strengthening the duty on fund managers to act in the best interests of investors
- requiring fund managers to return any risk-free box profits to the fund
- facilitating switching investors to cheaper share classes
- proposing to reject the undertakings in lieu of a market investigation reference
and there are further projects which the Report kicks off
- costs and charges disclosure to retail investors to be consulted on later this year
- benchmarks and performance reporting to be consulted on later this year
- convening a working group on objectives and consulting on any rule changes at a later stage, subject to the outcome of the working group.
Finally, the FCA will determine on whether investment consultancy market will be referred to the Competition and Markets Authority in September
To be clear, the Study does not;-
- Ban active fund management
- Impose a cap on transaction charges
- Demand a reduction in the average of 36% profit margin earned by fund managers
That it recognises that these kind of interventions are not within the scope of the FCA is to the FCA’s credit. Those of us, including those of us in the Transparency Task Force who have been intemperate , can learn from the measured tone of the Study. The Study is the stronger for it.
If I was to single one remedy above all , as capable of making a material difference to the lot of the customer, it is the strengthening of the duties of fund managers to act in the best interests of customers.
The requirement to add at least two independent members to fund governance committees is important but the accountability of the executives of fund managers as fiduciaries is more important. This goes beyond treating customers fairly and amounts to an obligation to exercise skill and care in all dealings commensurate with the money paid to fund managers through fees.
In short , those who run fund managers are going to have to demonstrate they are providing value for their money or else. This will be deeply uncomfortable for those who direct asset managers; it substantially hikes the risks of performing such functions and puts their financial well-being at risk.
The asymmetry of risk, where investors have no remedy for poor practice from their managers and managers are unaccountable for poor behaviour towards investors is key to the work of John Kay , Paul Myners and others. The FCA is finally doing something about re-addressing this asymmetry.
The rejection of the WTW/Aon/Mercer undertaking in lieu of a referral to the CMA is as welcome as it is surprising. For many years, these three firms have operated an effective cartel that has ensured that smaller consultancies have been unable to be heard.
Recently, the big three have extended the scope of the services they provide to include vertically integrated products like fiduciary management, master-trusts and the white labelling of fund solutions. This year, one of them extended their consultancy to provide a gate-keeping service for their clients that could have given them local powers equivalent to google and amazon combined.
The decision to reject this special pleading will be greeted with a sigh of relief by small schemes and their advisers who have consistently suffered from the imperious behaviour of the big three.
The FCA is clearly in action mode, I look forward to seeing action on the non-consultative points as soon as possible – getting good people onto fund governance committees will be a major undertaking and it’s very important that the work on a single charge with subsidiary work on a template for transaction costs is led by the right person.
I personally hope that the CMA get stuck into investment consultancy and that it comes under the auspices of the FCA (with all the costs and restrictions that will bring). Bring this on.
Finally- I look forward to the work that the FCA are proposing on platforms, retail disclosure and the disclosure and benchmarking of performance data.
Three cheers to the FCA for an 18 month project that has really delivered!