THE INVESTMENT ASSOCIATION

RESPONSE: ASSET MANAGEMENT

MARKET STUDY INTERIM REPORT

SUMMARY: A FRAMEWORK FOR CONSUMER-FOCUSED,

COMPETITIVE DELIVERY FOR SAVERS AND INVESTORS

February 20th 2017

INTRODUCTION

Managing other people’s money comes with significant responsibility.

That responsibility is increasing as millions of UK citizens are automatically enrolled into

pensions through auto-enrolment, and as the Pension Freedoms mean people are

remaining as investors post-retirement.

Asset management is a critical part of the saving process. It is essential in providing both the capital allocation and the sound stewardship needed to generate long-term returns.

In that context, the Market Study is a welcome opportunity for the FCA, industry and

other stakeholders to look at the role of the asset management industry.

For the industry to succeed in the years ahead, it needs the confidence of politicians, regulators and, most important of all, its customers. Increasingly, those customers are all

over the world, reflecting the exceptional capabilities of the UK as a global asset

management centre.

But the IA agrees that there are areas where the market can work better. Based on the Interim Report’s proposed remedies, we set out a framework in which to deliver the best

outcomes, transparently and in partnership with regulators.

The IA would like the industry and regulator to work together to deliver the following:

• A charging structure that uses a single Ongoing Charges Figure to account for the

fees taken for professional fund management services.

• Greater consistency in the expression of fund objectives and reporting of delivery

against those objectives.

• Implement full transparency through a new Disclosure Code (well advanced

already) for charges and transaction costs that covers not just the institutional

market, but all substitutable UK long-term savings products and services.

• Enhanced fund governance processes across the product lifecycle, proportionately

applied and subject to effective challenge. This means demonstrably robust

mechanisms for the definition, consideration and reporting of how funds deliver in the best interests of clients to enable governance bodies, advisers and investors

to better assess and compare value.

• A revised regulatory framework to facilitate delivery of good consumer outcomes

in areas such as legacy switching and fund mergers so as to remove barriers to

consumers both being offered and moving into the best value products.

KEY OBJECTIVES FOR SAVERS

The changes we would like to deliver in conjunction with the industry and the regulator

would have five key underlying objectives to improve outcomes for our savers and investors:

1. To facilitate customer choice and access across the market, whether products and services are provided on an active or passive basis. Facilitating choice also

requires that changes in the UK do not impede cross-border competition, effectively reducing the ability of UK savers to access overseas products and vice

versa.

2. To recognise and build on the direction of travel in existing and forthcoming

regulation which is already transformative for the better in key thematic areas covered in the Interim Report. Ongoing regulatory projects include MiFID II,

PRIIPs, the Retail Distribution Review and the Senior Managers and Certification Regime.

3. To establish a framework that ensures the application of these different regulatory

changes is both proportionate and joined up where there are common themes,

avoiding overlapping and duplicative regulation.

4. To foster an environment in which the active allocation of capital necessary for the good functioning of both markets and the underlying economy can take place

effectively.

5. To harness technological innovation in such a way as to facilitate improved

efficiency, transparency, information flow and customer communications.

VALUE THROUGH THE DELIVERY CHAIN

Intermediaries play a valuable and important role in connecting the asset management

industry with its customers. We agree with the FCA’s observation that the focus needs to be on both intermediaries and asset managers, and support the intention of the FCA to

undertake further work on the retail chain.

Consumer understanding, disclosure and the decision-making processes that affect retail

investor outcomes need to be considered in the context of different elements of value delivered through the chain.

The FCA finds that actively managed equity funds have performed noticeably better on average than passive funds even on a bundled fee basis that includes advice and

distribution costs. While passive funds are an important and growing part of the customer choice set, active fund managers play an important role both in providing value

to clients and to the broader economy.

The move to unbundled share classes under RDR will allow customers, intermediaries

and regulators to assess the performance of both active and passive funds on a much clearer basis.

DATA AND FINDINGS

While there are clear thematic continuities from a policy and supervisory perspective,

further data and clarification is needed to support both the market analysis and the connection between the findings and the range of remedies under consideration. We are

concerned that the evidence base used to justify the remedies is less clear than we would expect at this stage and we identify some significant areas where further analysis

would be helpful.

BACKGROUND TO OUR RESPONSE

The IA is pioneering initiatives that will benefit both our customers and the wider economy. Areas of focus include:

• A new transparency framework for charges and costs is well under way, to enable

clear, comprehensive and standardised cost comparison.

• How savers in defined-contribution schemes can invest on a more diversified

basis, to help people protect against negative market events.

• Moving away from short-term reporting to a longer-term focus on investment by

UK-listed companies, to foster an environment of long-term stewardship of our clients’ assets.

• The potential role of a municipal bond market, to help the Government to deliver

the best services possible to wider society.

• Our Productivity Action Plan brings together a number of work streams aimed at

improving the UK economy for all, and we will be reporting on progress in the Spring.

SUMMARY OF THE RESPONSE

Our response is laid out in seven parts, and we are making it public as part of our

commitment to transparency for our clients and interested stakeholders.

• Part One: Shape of the UK Asset Management Industry.

In pooling the savings of millions of individuals and households, the asset management industry plays a key role in channelling capital into the economy. As part of this, active

management should be defined more broadly than stocks and securities selection, encompassing capital allocation, price formation, risk management and asset allocation.

Asset managers also fulfil important oversight and stewardship functions on behalf of

investors. These activities are all pre-requisites for well-functioning markets.

• Part Two: Retail Market Competition, Price and Performance.

The Interim Report presents a number of key findings from the retail market relating to

price trends, price clustering, outcomes, investor behaviour, and industry profitability.

This Part considers these findings, commenting on the fact base as presented and, where relevant, providing additional evidence.

• Part Three: Investment Fund Fee Structures.

Transparency of charges and costs across the long-term savings market is a pre-requisite for building consumer trust. This Part analyses the FCA’s findings and proposed remedies.

We conclude that a single charge based on the OCF could provide a simpler proposition for customers to understand the cost of the professional service, alongside an estimate

of the transaction costs needed to deliver a return for customers. We also put forward

proposals on presentation, linking to the new IA Disclosure Code.

• Part Four: Investment Fund Disclosure and Objectives.

The Interim Report expresses a range of concerns about how asset managers communicate their objectives and outcomes to investors, and sets out preliminary views

about the way forward. The IA agrees that clarity of objectives and accountability for outcomes is extremely important and looks forward to dialogue with the FCA about how

to address the issues identified. One particular area of focus should be the scope for greater consistency of language and terminology.

• Part Five: Investment Fund Governance.

The IA supports the highest standards of fund governance. As a way to ensure that

customers can access products that they judge to be good value for money, we set out

how greater clarity of objectives and of fees and costs can be brought together with new product governance requirements in the context of the duty of care to unitholders. We

also consider how the exercise of that duty can be best subjected to effective challenge. The answer is likely to lie with a proportionate approach, drawing on European fund

governance models.

• Part Six: Regulatory Framework.

A range of issues arise in the Interim Report where the IA considers that regulatory change may be particularly necessary, focusing on barriers to switching (whether from

legacy share classes or other situations in which fund managers might wish to close or

merge share classes). We would like to work with the FCA to ensure that fund managers are more easily able to move investors to better value share classes and we argue for a

sunset clause on ‘trail’ commission to UK financial advisers. There are several areas in which enhanced regulatory processes could facilitate fund mergers/closures, again to the

benefit of investors.

• Part Seven: Institutional Market.

The Interim Report covers a broad range of areas regarding the institutional market. While solutions such as pooling may be effective in some areas, a number of core

principles are clearly fundamental in helping to facilitate good outcomes. We identify the

importance of enhanced transparency from the industry and enhanced investment governance at the client level. Improvements in these areas, alongside changes to the

way in which investment consultants operate, notably bringing their activity into the FCA’s regulatory perimeter, will help the institutional market operate more effectively.