The City watchdog confirmed it will support the introduction of a single ‘all-in’ charge for funds to drive competition in the industry in its long-awaited final report on the asset management market.
It will also bring in a new requirement for funds to have at least two independent directors on their boards and strengthen the duty of managers to act in the best interests of their clients.
“The persistently high levels of profit earned by asset management firms suggest that prices lie above competitive levels, which in turn indicates that on average investors may not be achieving value for money,” the regulator said.
The FCA said it stood by the criticism in its interim report, published in November last year, of weak price competition across the industry, claiming charges had remained high and fund managers had not passed savings achieved through economies of scale on to clients over the past decade.
It added that investors are also not always clear what the objectives of funds are, and fund performance is not always reported against an appropriate benchmark.
Andrew Bailey, chief executive at the FCA, said it was essential savers saw returns in the current low interest rate environment.
“We have listened carefully to the feedback we received in response to our report last November,” Bailey said.
“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 estimated that the UK asset management industry manages over £1trn ($1.3trn, €1.1trn) for UK retail (individual) investors, £3trn on behalf of UK pension funds and other institutional investors, and around £2.7trn for overseas clients.
Investment platforms also came under fire from the regulator in the final report and a new market review of the platform market is set to take place.
The FCA said it was not clear that retail investors benefit fully from the potential buyer power available to platforms.
“Investors can be charged a range of different platform fees, potentially making it difficult to understand the full cost of investment,” it added.
The regulator also noted that many respondents to its interim report had pointed out that model portfolios were poor value for money, including extra fees for limited additional values.
“Some of these issues will be covered in our market study into investment platforms.
“The study will explore how ‘direct to consumer’ and intermediated investment platforms compete to win new and retain existing customers. The study will explore whether platforms enable retail investors to access investment products that offer value for money,” the FCA said.
The FCA has also recommended the government move to bring investment consultants under its remit.
“On average, consultants are not able to identify managers that offer better returns to investors,” the FCA said.
“However, the manager selection process ensures that asset managers meet minimum quality standards and reduces operational risk for investors.”
Adding: “Consultants do not appear to drive significant price competition between asset managers.”