UK Asset Managers Ordered by FCA to Demonstrate Value for Money Amid Rising Competition

The UK Financial Conduct Authority (FCA) has issued a directive to asset managers, requiring them to substantiate the fees associated with their funds, intensifying the scrutiny that firms are facing in light of the growing popularity of low-cost passive trackers.

In a move unveiled on Thursday, the regulatory body disclosed that its review of authorized fund managers revealed a confluence of profitability considerations and assessments of funds' value for money, leading to varying fee structures charged to clients.

The ascent of passive investing in recent times has spurred heightened competition in the industry, compelling several funds to trim their fees and ushering in a wave of consolidations as asset managers strive to slash costs and preserve their margins.

Nevertheless, despite these fee reductions, the FCA is pushing for an overhaul of the way fees are calculated, contending that certain asset managers are still falling short of providing satisfactory value for clients who are burdened by high charges.

Camille Blackburn, Director of Wholesale Buyside at the FCA, underscored the significance of firms ensuring that their focus is not solely on a fund's profitability, emphasizing the imperative of value for money for investors. The FCA emphasized its expectations for companies to enact improvements where necessary and affirmed its intent to take corrective measures if deemed requisite.

Blackburn further conveyed that boards of authorized fund managers and senior managers shoulder the responsibility of effectively executing value assessments and swiftly resolving any identified issues.

This directive follows the implementation of the FCA's consumer duty on August 1, which mandates that financial services companies demonstrate a prioritization of customers' interests.

The FCA's move also follows the introduction of regulations in 2019, compelling asset managers to conduct annual value assessments and appoint independent directors to the boards of authorised fund managers. These regulations were introduced after a report highlighted evidence of weak price competition within the sector.

Within its latest review, the FCA raised concerns about directors, asserting that most of them "did not provide sufficient challenge" to the information presented to them regarding funds' value for money. Some directors seemingly accepted this information "at face value without probing further."

The regulator noted that numerous companies defended their fees by asserting that they were in line with industry peers. Others argued that they would only consider fee reductions if their pricing was found to deviate from other firms.

"We consider that justifying fees solely based on a comparison with peer funds does not amount to meaningful compliance," stated the FCA.

For the review, the regulator surveyed 14 authorized fund managers between November 2022 and March 2023.

The FCA also highlighted instances of good practice, such as some managers assigning poor ratings to active funds that had underperformed their benchmark, even in cases where their capital had increased. However, the FCA detected instances of firms relying on "easily achieved" capital growth targets instead of conducting comprehensive assessments of their performance, fees, and market risk relative to competitors.

The review revealed an instance where an actively managed fund received a positive performance rating despite underperforming the market benchmark by 10% over a five-year period. Notably, none of the assessed firms had reduced their fees in response to poor performance.