Tech Investment Could Help UK Asset Managers Meet FCA's Calls for Sweeping Changes

“We have listened carefully to the feedback we received in response to our report last November,” said FCA CEO Andrew Bailey, in a statement. “We have put together a comprehensive package of reforms that will make competition work better and help both retail and institutional investors to make their money work well for them.”

The FCA found, in a 114-page report released on June 28, that there was little relationship between fund performance and the fees charged to investors, while both passively and actively managed funds did not outperform their benchmarks on average. The FCA said that it also had “concerns” around how asset managers communicate their investment objectives to clients.

The FCA’s reforms include enhanced transparency requirements for fund-management practices, “consistent and standardized” disclosures of costs and charges to institutional investors, and the introduction of a single, “all-in” fee, which would include trading costs.

“At first glance, the requirements for increased transparency on prices look tough for asset managers,” says Patricia Regnault, Europe head of asset management at vendor Linedata. “But if we take a step back, these proposals should help the buy-side industry to remain sustainable and grow stronger.”

The introduction of such a fee has been the subject of criticism from some parts of the industry, but incoming European legislation through Mifid II will introduce this for investors using an intermediary.

“At the heart of [the FCA’s] proposals stands the customer,” says Andrew Carter, CEO of Royal London Asset Management. “As an asset manager owned by a mutual company, this is already very much part of our ethos. Transparency is an important guiding principle, which benefits not just consumers but also the industry at large and therefore we support the move toward clearer presentation of costs and charges for consumers.”

With just under £7 trillion ($9 trillion) in assets under management, the UK asset management industry is the second-largest in the world, behind the US. Roughly £1 trillion of that total is managed on behalf of retail investors, while around £3 trillion is managed on behalf of institutional investors, including pension funds. The remainder is largely money managed for overseas investors.

Invest in Tech

The report, along with incoming regulatory measures from Europe, is likely to prompt a wholesale shift in how the UK’s asset management industry operates. Some suggest that investments in technology could help firms to comply with requirements and bring down costs.

“While some may argue otherwise, I would feel that the timing is inspired,” says Raghav Kapoor, CEO of research provider Smartkarma. “There is widespread appetite to embrace positive change, and business models in the asset management industry as well as traditional sell-side firms are rapidly evolving to cope. I believe a necessary consequence will be the swifter adoption of technology-driven, superior business models that help drive change at scale.”

These could include emerging technologies, some of which are still at a nascent stage of development but are receiving a great deal of attention from buy-side firms, such as artificial intelligence (AI).

“Digital technology, machine learning and targeted outsourcing will help the smartest asset managers to reduce their overheads without compromising investor satisfaction,” says Linedata’s Regnault. “Blockchain is also a longer-term source of cost optimization thanks to a real dematerialization, estimated to have the potential to reduce some operational costs by as much as 30 percent,” she continues, making reference to the findings of a recent report on blockchain by consultancy Accenture.

The FCA took a much harder line on investment advisory and consultancy services, which advise funds on where to allocate their assets. This, the FCA said, should be brought within the regulatory perimeter by the UK Treasury, while it provisionally decided to refer competition issues in consultancy to the Competition and Markets Authority (CMA) for a full investigation. A formal decision is expected in September.

“A number of consultants offered undertakings in lieu of the reference to the CMA,” says Ian Cormican, a partner at law firm Sackers, which works on behalf of pension scheme trustees and sponsors. “While the FCA’s provisional view is that it should reject the undertakings, the cat is out of the bag in terms of what consultants can offer by way of disclosure and conflict management. Trustees are likely to expect their consultants, if they are not already doing so, to comply with the undertakings pending a final decision from the FCA in September 2017.”