The United Kingdom’s (UK) financial services watchdog, the Financial Conduct Authority (FCA), is embarking on a shake-up of charges and opaque fees in the multi-trillion pound asset management industry.
When completed, it would have far-reaching consequences beyond its borders, including the RM2.82 trillion Malaysian asset and wealth management industry.
The UK’s asset management industry is the second largest in the world, managing £6.9 trillion (RM37.8 trillion) worth of assets, including £3 trillion on behalf of UK pension funds (as opposed to Malaysia’s Employees Provident Fund with RM684.53 billion worth of assets under management) and other institutional investors, and around £2.7 trillion on behalf of overseas clients, including Malaysian high net-worth individuals.
The UK is leading the way to ensure that the asset management market works well and the investment products consumers use offer value for money.
The western markets have, over the last decade, seen several cases of misselling of insurance products, including payment protection insurance (PPI) for credit cards and other loans, which has resulted in millions of customers being compensated and asset managers being heavily fined, a process which is still ongoing in the UK.
Two years ago, the FCA also launched a consultation on fee structures for investment funds, some of which have a six-tier fee structure, including passing on third party research and advisory fees to investors.
The FCA wants the unbundling of fee structures, including commissions, which investors have long complained are enmeshed in a murky opaque system.
The FCA is considering whether to refer the asset management industry to the UK’s Competition and Markets Authority in an effort to clamp down on anti-competitive practices and lack of transparency in fees and charges, which one asset manager in London warned is a more serious issue for wealth managers than Brexit.
Improvements in value for money in fund management could have a significant impact on pension and savings pots. Even small differences in charges, stresses the FCA, can have a significant impact over time. The importance of an asset management industry to an economy cannot be underestimated. Asset managers manage the savings and pensions of millions of people, making decisions for them that will affect their financial well-being.
With pension funds and lack of pension provision a major issue globally, and plagued by burgeoning pension black holes and shortfalls and growing inequality in final pension payouts between the haves and have-nots, regulators are at last being serious in reining in the perceived excesses of asset managers.
Perhaps an asset management industry is as good as its regulatory oversight and a reflection of the regulatory culture and competence of a particular market.
In an interim report on the UK Asset Management Market Study published a few days ago, the FCA warned of a number of serious shortcomings, which is a devastating indictment of the practices of the asset management industry.
These include:
WEAK price competition in a number of areas of the asset management industry. This has a material impact on the investment returns of investors through their payments for asset management services;
ACTIVELY managed fund charges have stayed broadly the same for the last 10 years. There is considerable price clustering for active equity funds. As fund size increases, price does not fall, suggesting the economies of scale are captured by the fund manager rather than being passed onto investors in these funds;
IN contrast, charges for passive funds have fallen over the last five years. This, combined with the growth of passive investing, suggests that price awareness and competitive pressure on price is building among certain groups of investors;
ASSET management firms have consistently earned substantial profits across the FCA’s six-year sample, with an average profit margin of 36 per cent. These margins are even higher if the profit sharing element of staff remuneration is included;
IN many markets, weak pressure on price is associated with weak cost control;
ACTIVELY managed investments do not outperform their benchmark after costs. Funds which are available to retail investors underperform their benchmarks after costs — while products available to pension schemes and other institutional investors achieve returns that are not significantly above the benchmark; and,
THERE is no clear relationship between price and performance — the most expensive funds do not appear to perform better than other funds before or after costs.
The FCA agrees that some progress has been made on the transparency issue, although investors very often are not given information on transaction costs in advance, meaning that they cannot take the full cost of investing into account when they make their initial investment decision.
The UK regulator also expresses concerns about how asset managers communicate their objectives and outcomes to investors.
The FCA is proposing a strengthened duty on asset managers to act in the best interests of investors; the introduction of an all-in fee approach to quoting charges so that investors in funds can easily see what is being taken from the fund; requiring asset managers to be clear about the objectives of a fund; clarifying and strengthening the use of benchmarks; identifying persistent underperformance; switching to better value share classes; clearer communication of fund charges and increased transparency and standardisation of costs; and clearer disclosure of fiduciary management fees and performance.
The Malaysian RM0.66 trillion asset management industry is one of the better-regulated ones in the world, albeit there is never room for complacency. Prime Minister Datuk Seri Najib Razak earlier this year identified Islamic wealth management, for instance, as “the new growth area” for the global Islamic finance industry.
Putrajaya is keen to further incentivise the RM0.13 trillion Malaysian Islamic wealth management sector and looking at opportunities to collaborate in the sector “with other jurisdictions, as well as with industry, to expand international connectivity, strengthen talent and capabilities, and grow the global Islamic capital market for the benefit of all”.
Here the Securities Commission can learn from the FCA experience!
Mushtak Parker is an independent London-based economist and writer