The FCA last week unveiled ambitious plans to stimulate competition in the asset management industry and strengthen investor protections. Whilst these plans relate mainly to the managers of retail funds, certain measures may affect private equity and hedge fund managers – in particular, those relating to the disclosure of costs and charges.
Overview
In its final report on the Asset Management Market Study, published on 28 June 2017, the FCAconfirmed its earlier findings that:
- price competition is weak in a number of areas of the asset management industry
- there is no clear relationship between charges and performance
- past performance information is of limited value
- there is a lack of clarity in the communication of asset managers' objectives
- investors' awareness and focus on charges is often poor
- a near oligopoly (coupled with a weak demand side and low switching rates) and conflicts of interest present significant concerns in the UK investment consultancy market
- the benefits of retail investment platforms are questionable
Our briefing on the FCA's interim report can be found here.
The FCA proposes to deal with these issues through a package of remedies, some of which are the subject of a concurrent consultation exercise (see CP17/18), some of which will be the subject of a future consultation exercise and some of which are final remedies requiring no further consultation.
The proposed remedies are designed to support and complement various other regulatory initiatives affecting asset managers, including MiFID II, PRIIPs and the Senior Managers and Certification Regime (SM&CR).
Remedies
To provide protections for investors who are not well placed to find better value for money, the FCAproposes:
- to strengthen the duty on investment managers to act in the best interests of investors through clarifying its expectations around value for money and increasing accountability through the SM&CR
- to impose a requirement that fund managers appoint a minimum of two independent directors to their boards
- to require fund managers to return any risk-free "box profits" to the fund and disclose box management practices to investors
- to introduce measures to make it easier for fund managers to switch investors to cheaper share classes
To drive competitive pressure on asset managers, the FCA will:
- continue to support the disclosure of a single all-in fee to investors
- support consistent and standardised disclosure of costs and charges to institutional investors by convening a group of industry and investor representatives to agree a template of costs and charges
- chair a working group to focus on how to make fund objectives more useful and consult on how benchmarks are used and how past performance is reported
- recommend that the Department for Work and Pensions continue to review and, where possible, remove barriers to pension scheme consolidation
To improve the effectiveness of intermediaries, the FCA will:
- seek views on rejecting the undertakings in lieu of a market investigation reference to the Competition and Markets Authority (CMA) provided by Aon Hewitt, Mercer and Willis Towers Watson (the market investigation reference in question concerns investment consultancy services)
- recommend that the Treasury considers bringing investment consultants into the regulatory perimeter
- launch a market study into investment platforms to look at how competition is working in that market
Commentary
Anyone in the asset management industry hoping for a post-Brexit 'bonfire of the regulations' will be disappointed with the direction of travel contemplated by FCA.
The headline-grabbers from the 112-page report have been the FCA's commitment to the all-in fee, the requirement that managers have two independent directors on their boards, the proposed ban on risk-free "box profits" and the recommendation that investment consultants be brought within the regulatory perimeter.
None of these measures will directly impact private equity and hedge fund managers (other than those managing UCITS funds).
Of more relevance are the proposals relating to the disclosure of costs and charges to institutional investors. The FCA noted that private equity and hedge funds were "particularly opaque" in this respect.
MiFID II is introducing significant changes in this area, by requiring pre-contractual information on costs and associated charges to be provided to clients, followed by an annual disclosure of actual costs.
In this context, the FCA continues to support the development of a standardised disclosure template and will convene a group of key stakeholders to drive this forward. Previous attempts at imposing standardised templates for private equity managers have had only limited success, despite the best efforts of the likes of the International Limited Partners Association. It remains to be seen whether the FCA's initiative will yield better results.
At present, these requirements will only apply to managers carrying on MiFID business, including full-scope AIFMs carrying on portfolio management or other MiFID activities under article 6 of the AIFMD.
However, the FCA's observations about private equity and hedge funds (in a report which ostensibly had nothing to do with those sectors) may presage greater regulatory focus on the alternatives space.
Such a move would be consistent with international experience: fee disclosures by private equity managers has been an area of focus for the SEC (as evidenced by the recent Apollo, KKR and Blackstone settlements last year, for example) and where the SEC goes, the FCA invariably follows.
Managers – you have been warned.
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