Posted: 19th December 2016
Evidence gathered as part of the FCA’s Asset Management Market Study (AMMS) suggests there is weak price competition in a number of areas of the industry.
This was the crux of the FCA’s findings, communicated via its interim report (MS15/2.2) in November.
This is resulting in a material impact on the investment returns of investors through their payments for asset management services. To address this, the regulator has introduced a series of proposed remedies. Following the publication of the interim report, what more do we understand about the implications of the AMMS for firms? What is compliant and effective management of funds likely to look like?
Value for money remains a key area of focus for the regulator. More so than ever, there is an expectation that firms must be able to demonstrate sound and robust methodologies that continually assess whether the investment products and services they provide to consumers offer value for money. Where they do not, firms should ensure there are processes in place that appropriately address any issues identified.
As well as value, asset management firms are expected to provide customers with transparent charging structures and clear communications that they will engage with and fundamentally understand in order for them to make informed decisions about the suitability of their product.
Three key factors for firms to consider
Value for money
The lack of competition in a number of areas of the asset management industry is causing customers to lose out. Significant price clustering and the performance of actively managed funds in relation to their costs when compared with passive funds are two of the most prominent issues for the regulator.
For example, the FCA calculated that investors could earn 44% more over 20 years in a low-cost passive fund, in comparison to a typical active fund, when all costs are taken into account. Firms should consider how their products deliver value for money and are therefore aligned to treating customers fairly outcomes.
Another area of concern is where investors are taken down the in-house fund or portfolio route, for example; advisers promoting in-house funds. There are concerns that the additional fees for the fund arrangement may not represent value for money. How rigorous adviser networks are in selecting the funds is likely to be an ongoing concern and focus for the regulator.
There are some key areas where firms may want to review their current processes to ensure they are delivering against customers’ and the regulator’s expectations:
1. Product lifecycle
- Does the product approval process include an assessment of value for money?
- Does your firm investigate whether its products are set up to deliver value using ongoing reviews?
- Do fund governance bodies satisfy themselves that products invested in will deliver real value for money?
- Are asset managers’ costs in relation to actual fund performance properly considered when your firm assesses the value for money of a fund, whether at product sign-off stage or during interim reviews?
2. Management information
- Does your firm embrace the opportunity to build a picture of customer satisfaction and outcomes, and a deeper understanding of any issues in current service offerings using effective MI?
- Does MI provided to the board include information on complaints or the results of outcomes testing and product reviews – and is the information sufficiently granular in order for the board to make informed decisions?
- Is appropriate root cause analysis (RCA) conducted on identified trends to rectify issues and improve product performance and customer satisfaction?
- Do boards and sub-committees get the right MI on the value for money of funds?
3. Policies and procedures
- Do you have specific policies and procedures in place for collating and assessing fund performance information and conducting RCA?
- Are your current risk tolerances sensible and are they conducive to protecting customers? Any breaches of tolerances such as product not performing or producing the expected returns within agreed parameters should be investigated and remediated
4. Governance and oversight
- Do you have suitable internal governance arrangements in place to provide challenge on MI that identifies the potential for poor customer outcomes or value?
- Are agendas and Terms of Reference for governance committees set up to ensure a consistent approach and structure for assessing products?
Communications with customers
When the FCA launched discussion paper DP15 / 4, which explored options for introducing market-wide transparency measures to encourage competition on aspects other than price, it was a signal of intent of the regulator’s desire for the industry to improve communications with customers. Underpinning this was the need to ensure communications with customers adequately educated and informed about their product(s).
Since then, the FCA has explored the importance of smarter communications with customers to support them in making informed choices. The overarching message from the regulator has been for firms to rethink not only what they communicate, but also how they chose to communicate with customers to ensure it remains engaging and relevant.
Firms should expect communications with customers to be one of the biggest areas of focus for the regulator and should consider how, when and to what extent current their communications empower and inform customers.
Some proposals (such as being clearer about fund objectives and updated reporting on progress against objectives) will be relatively easy to embed into current processes. However, firms need to consider language, jargon and the medium used to communicate these messages to ensure it remains accessible to all, particularly for vulnerable customers.
To support firms, the FCA has outlined a number of principles for designing effective disclosures to increase consumer engagement and understanding:
- Plain language with short, understandable messages
- Key information displayed prominently and framed effectively
- Communications designed around the needs of target groups of consumers, i.e. not a one-size-fits-all approach
- Using images and graphics to display essential information
Transparency of charges
Linked to customer communications and key to the issues in identifying value for money is the amount and transparency of charges for actively managed funds. The FCA identified a number of issues relating to charges for actively managed funds, the main ones being:
- Asset managers do not effectively manage and control complex charges
- Around half of non-advised retail investors were not aware they were paying charges
- Some institutional investors are not presented with comparable information on charges
The main proposal by the FCA is to introduce an ‘all-in fee’ to simplify their interaction with their managed funds. Essentially, this would increase the transparency of all charges so that investors can adequately assess and calculate the total quoted amount to be deducted from the fund.
Firms will have to consider how their current charging structure can be augmented to make it more simplistic and concise. In addition, firms must ensure that any communication with customers regarding costs and charges should be easy to understand. Best practice would be to use working examples.
Preparing for a new landscape?
In regards to findings of the Asset Management Market Study interim report, there were no real surprises, and much of the FCA’s proposed remediation actions are consistent with studies previously conducted in other ares of the financial services sector. However, it gave some clear signals as to where firms should focus their attention.
Firms should be prepared for the final report in quarter two of 2017, after the consultation ends on the 20th February 2017.
The AMMS provides a great opportunity for firms to take the initiative in the ongoing regulatory mission to ensure customers are treated fairly and receive fair outcomes.
However, they should not underestimate the importance of empowering customers with clear and transparent communications, as well as having a clear value for money methodology. The benefits this can have in terms of customer advocacy and trust in your brand could be significant.