FCA sets out wide-ranging terms of reference for UK asset management study

The regulator will examine value for money for retail and institutional investors, the potential for conflicts of interest and the extent of any barriers to innovation in the field of asset management, according to its terms of reference. It may narrow the scope of its work to focus on particular areas of concern when it publishes an interim report in summer 2016, it said.

Depending on the outcome of its work, the FCA said that it could "intervene" to promote effective competition through new rules or enforcement action. It expects to publish its final report in early 2017, it said.

Financial regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law.com, said that the UK's asset management industry had been a "welcome success story", despite being forced to deal with "seismic regulatory changes over the last few years".

"The FCA recognises that the asset management industry is one of the UK's most significant exports and is the largest in Europe," she said. "The paper does however indicate that one of the outcomes of the study may be further rules or direct action against individual firms."

"What is notable is that the study is wide-ranging and encompasses not only the managers themselves but also those along the value chain – whether distributors, fiduciaries or other advisers – and is set against the backdrop of examining whether there are barriers to innovation and technological advances, a theme that is very much at the forefront of the FCA's current thinking," she said.

The FCA said that it would approach market participants directly for information and data to inform its work, and would host a series of "roundtables and meetings" throughout the market study. It is also seeking general feedback on its terms of reference until 18 December.

With around £6.6 trillion worth of assets under management, the UK's asset management industry is the largest in Europe. This figure includes around £2.1 trillion worth of pension fund investments, around £1.2 trillion in retail investment products and £400 billion in public sector and charity investments. There is a further £1 trillion investment in insurance products and £1 trillion invested in 'non-mainstream' asset management products, both of which include pension fund investments.

The FCA said that it was "essential" that the asset management industry was sufficiently competitive, given its size and its impact on consumer investments, pension funds and insurance premiums. An improvement in competition that reduced total charges paid by investors by even a small amount "could have a large impact on investors' net returns", it said.

According to the terms of reference, the study will focus on three broad areas: how asset managers compete to deliver value for their customers; whether asset managers are willing and able to control costs and quality along the value chain; and how investment consultants affect competition for institutional asset management. The FCA will also seek to understand the impact of any barriers to innovation or technological advances which may be preventing new ways of doing business as part of each of the three topics.

Competition law expert Jenny Block of Pinsent Masons said that the terms of reference brought out a number of "familiar themes".

"In terms of market structure, while the sector as a whole is not felt to be concentrated the FCA considers that there may be pockets of concentration in particular asset classes, and firms should note that relevant economic markets may be defined narrowly for these purposes," she said.

"The study will include a detailed review of pricing and profitability, considering price differentiation and levels of pricing generally. Any profitability analysis is likely to be complicated and it is notable that in the retail banking market investigation, ultimately the CMA felt that a meaningful appraisal and comparison could not be undertaken. No doubt there are slightly different considerations here, but the exercise and its results will have to be considered with some care," she said.