Great Expectations met?

13 July 2017

JLT Investment Solutions reflect on the findings of the FCA Asset Management Market Study

BACKGROUND

The FCA provided its Final Report for its Asset Management Market Study at 7.08am on 28 June 2017. It runs to 112 pages and is a wide ranging and relatively easy read. Crucially our first priority was to see whether our expectations were met, whether it was good (or bad) for asset management and investment consulting businesses and which bits were seen as good and which bits needed addressing.

Our wish list highlighted below focussed on 5 main aspects. We now look at how these were covered in the FCA’s report and then turn to other matters.

TRANSPARENCY OF COSTS

Our Wish

We fully support moves to require greater transparency of costs and hope the FCA encourages this.

FCA Response

To drive competitive pressure on asset managers, the FCA will:

  • support the disclosure of a single, all-in-fee to investors;
  • support the consistent and standardised disclosure of costs and charges to institutional investors.

JLT View

Our conclusion is that our wishes have been addressed and this should lead to better outcomes for investors.

POOLING (AGGREGATION) OF SCHEME ASSETS

Our Wish

Our hope is that the FCA recognises that pooling already exists to the benefit of clients and should be encouraged.

FCA Response

Recognition that Fiduciary Management already provides pooling benefits and that small schemes with expertise and good governance can secure positive outcomes. However, to drive competitive pressure on asset managers, the FCA will:

  • recommend that the DWP remove barriers to pension scheme consolidation and pooling.

JLT View

Our conclusion is that this has, in some of the finer detail, been met. However we are unclear as to how this consolidation and pooling will be achieved owing to the difficulties of amalgamating schemes with differing viability of sponsors, benefit structures, funding levels and rules provisions. Platforms exist already (and indeed within JLT) to achieve the cost benefits of pooling of assets. Given the steer we foresee greater consolidation through these vehicles.

This however does not require new legislation driven by the DWP. The report also implies that full delegation for small schemes through Fiduciary Management is seen as a good solution.

ACTIVE MANAGEMENT

Our Wish

Any focus from the FCA for consultants to justify their recommendations in terms of specification of investment briefs, objectives and consistent benchmarking is to be welcomed.

FCA Response

To drive competitive pressure on asset managers, the FCA will:

  • chair a working group to focus on how to make fund objectives more useful and consult on how benchmarks are used and performance reported.

JLT View

Our conclusion is that this has been met.

FIDUCIARY MANAGEMENT

Our Wish

The FCA has the opportunity to encourage Fiduciary Management. We expect the FCA to require greater scrutiny of the offerings, recognition of the challenges posed by use of internal funds and the need for greater transparency, greater disclosure of conflicts and comparison against peers.

FCA Response

Not explicitly covered, although it is likely to get further investigation if there is a market investigation reference to the Competitions and Market Authority (CMA).

JLT View

Whilst not explicitly covered in the executive summary, the scrutiny of offerings and greater transparency are already covered above.

The use of internal funds is covered below under aspects of regulation. Again our conclusion is that this is met.

REGULATION OF THE INVESTMENT CONSULTING MARKET

Our Wish

We do not expect the FCA to go down the route of regulation. However were they to do so we would encourage a principles based approach built on good practices.

FCA Response

To help improve the effectiveness of intermediaries, the FCA will:

  • seek views on rejecting the undertakings in lieu of a market investigation reference regarding the institutional advice market to the CMA;
  • recommend that HM Treasury considers bringing investment consultants into the FCA’s regulatory perimeter.

JLT View

Our expectations were misplaced perhaps, but we are, as we said in the previous document, very relaxed about regulation. The undertakings jointly provided by Aon, Mercer and Willis Towers Watson whilst perhaps very well meant have not satisfied the FCA and the inevitability of regulation appears certain. They wish for the CMA to carry out further market studies, however this will inevitably bring further delays to the regulation of the Investment Consulting market. The FCA are to be congratulated at the depth of their study and it is hard to believe that the CMA would reach different conclusions. They already recognise the lack of homogeneity in the market. Regulation will allow the FCA

to set down what “good looks like” and address its concerns around conflicts, competencies, appropriateness and transparency.

However, we welcome the proposal to ask HM Treasury to bring asset allocation advice within this regulatory perimeter, as this should help protect members of smaller pension schemes.

OTHER MATTERS

In addition to the above:

  • To help provide protection for investors who are not well placed to find better value for money, the FCA proposes to:
    • strengthen the duty on fund managers to act in the best interests of investors and use the Senior Managers Regime to bring individual focus and accountability to this;
    • require fund managers to appoint a minimum of two independent directors to their boards;
    • introduce technical changes to improve fairness around the management of share classes and the way in which fund managers profit from investors buying and selling their funds.
    • To help improve the effectiveness of intermediaries, the FCA will:
      • launch a market study into investment platforms.

JLT View

These comments are targeted at the “retail arena” and are not surprising. Many asset managers (including JLT) already comply with the requirements to have independent directors and duties to act in the best interests of clients. It is therefore to be welcomed that the wider industry will adopt these sound practices.

Our overall conclusion is a job well done, much in line with our expectations, a few surprises but all with the aim of improving investor outcomes. We look forward to continuing to work with the FCA in shaping the detail and a regulatory regime fit for purpose.

Contact:

Phil Wadsworth, Chief Actuary | T: 0161 242 5321 | E: phil_wadsworth@jltgroup.com

Whilst all reasonable care has been taken in the preparation of this document no liability is accepted under any circumstances by Jardine Lloyd Thompson for any loss or damage occurring as a result of reliance on any statement, opinion, or any error or omission contained herein.  Any statement or opinion unless otherwise stated should not be construed as independent research and reflects our understanding of current or proposed legislation and regulation which may change without notice.  The content of this document should not be regarded as specific advice in relation to the matters addressed. 

JLT Investment Solutions is a trading name of JLT Benefit Solutions Limited, registered in England No 02240496 and JLT Investment Management Limited, registered in England No 04274915.  Member of the Jardine Lloyd Thompson Group. Authorised and regulated by the Financial Conduct Authority.  Registered Office: The St Botolph Building, 138 Houndsditch, London EC3A 7AW. VAT No. 244 2321 96.