A radical change of the UK’s £7 trillion investment industry has been called by Britain’s markets watchdog, the Financial Conduct Authority (FCA), aimed at improving transparency and protection to investors. Well intentioned objectives for greater transparency risk turning the UK investment industry into an uncompetitive environment unless UK based investment managers seize the opportunity to turn operational change into a golden opportunity.
On June 28th, the FCA released its long-awaited Asset Management Market Study and published a package of remedies for the industry, having over the past few years moved their focus from banks to other sectors in the financial system that potentially pose risks in the future.
To increase the transparency of what those risks may be, the FCA has investigated how performance fees are charged and bans asset managers across all sectors from receiving “box profits”, an extra source of income derived from a funds transaction activity. In essence, the FCA would broaden new EU fee disclosure requirements which come into force in January, demanding intermediaries to charge a simple and all-in fee from investors. This practice would intensify competition among asset managers and improve the comparability of portfolios between two or more managers for investors, particularly individuals.
To establish fair competition, the FCA is also proposing to regulate asset managers to include two independent directors on a fund’s board to improve governance standards. Unexpectedly however, the watchdog also pays attention to the investment consulting industry. The influential consulting firms such as Aon Hewitt, Willis Towers Watson and Mercer determine how the majority of UK pension plans invest and the FCA has requested the government to authorise it to regulate and oversee consultants and the nature of their business practices.
In conclusion, the FCA’s proposal will certainly reform the entire operational system in which the UK investment industry has worked so far, including fee charging system, fund boards, investment platforms, and partnership with consulting firms. Apart from the domestic regulatory transformation that will now take place over the next few years, UK asset managers will face another challenge: Brexit. After Brexit, channels where funds can be sold to non-UK investors will likely be changed. Asset management companies need to spend more money on compliance with EU systems, putting increasing cost pressures on the UK investment industry that counter-parts in the EU and U.S. simply won’t face. Creating an uncompetitive environment for asset managers is not good for the industry, the regulator, or Her Majesty’s Treasury, who are sensitive not to deter financial service companies from treating London as the European hub for investment activity.
If the FCA doesn’t heed these risks and managers don’t consider how to turn ‘Managed in Britain’ into a bonus for domestic and international investors, then a great opportunity could be lost.
At Clear Path Analysis, we’re investigating the changing environment that asset managers are operating in, at the Fund Management Operations Summit to be held at One America Square in London on the 31st October and followed up by release of the seventh annual Fund Technology, Data & Operations, Europe opinion report. Click on the links for both to learn more.
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