It is frequently mused that two things in life are assured, chiefly death and taxes. A third can now be added to that list, namely that fund managers in the UK will have to disclose more detailed information to end institutional clients about their costs following widespread criticism about the abundance of hidden charges in the industry.
UK regulators have not been introverted in their scrutiny of fund management having conducted a series of reviews since 2012 exploring the industry’s practices. The latest review released in June 2017 delved into whether asset managers provide genuine value for money to customers. However, most active asset managers were actually pleasantly surprised by the AMMS final report’s contents, having long assumed the Financial Conduct Authority (FCA) was going to seriously chide the industry in its conclusions.
The FCA did not censure the industry, nor did it refer managers to the Competition and Markets Authority (CMA) as it did with the investment consultants. In addition, the FCA soothed active managers’ fears that it had any bias towards passive products, an assumption that had rapidly accumulated across the industry after first perusals of the November 2016 AMMS Interim Report.
But it would be dangerous to presume that the non-referral of asset managers to the CMA is some sort of victory, or a sign that the regulator is going soft on the industry. Far from it. The sheer fact the FCA stamped its authority on the powerful consultancy industry should be seen as an indicator that UK regulators are unafraid of using leverage to extract reform out of sectors that have long avoided it.
The key difference between the outcome for fund managers versus consultants in the AMMS is that the former has been given time by regulators to modify their traditional way of doing business. In September 2017, the FCA announced the formation of the Institutional Disclosure Working Group (IWDG), a body mandated with coming up with a standardised cost disclosure template, which asset managers will have to provide to their end institutional clients.
The IWDG is being led by Dr Chris Sier, professor of practice at Newcastle University Business School, and himself an ex-policeman. The group comprises of members and observers across financial services, regulators, academia, government departments and trade unions, and it looks to build upon some of the work already done on standardising cost disclosures by the Investment Association (IA) and the Local Government Pension Scheme (LGPS).
Unlike previous standardisation initiatives, which have sought to impose uniform obligations on diverse industries, the IWDG recognises asset managers are distinct. In the IWDG’s terms of reference, it asks whether different asset classes or fund types will require separate data collection templates. That this body has recognised the divergences in the industry is an excellent starting point. Nonetheless, asset managers should still brace themselves for probing questions.
The final standards are obviously not known, but early signals would suggest they will be robust and detailed. The Financial Times reported that a disclosure template put forward by the Standards Board for Alternative Investments (SBAI, formerly known as the Hedge Fund Standards Board) was dismissed as insufficient by the IWDG chair as it contained no references to trading commissions, equity financing and stock borrowing costs.
For asset managers, the idea of collecting yet more data – in addition to existing regulatory obligations such as PRIIPs, MIFID II, AIFMD and UCITS – is probably an unwelcome supplement to their already frenzied day-to-day activities and ascending costs. Admittedly, the precise data sets are undetermined, but data management has generally not been a forte at most fund managers.
A point made at the recent ALFI Conference in Luxembourg was that many organisations inferred they had significant amounts of big data in their possession, but were fairly clueless about making any sense or use of it. In all likelihood, asset managers will probably outsource any data aggregation and consolidation processes to their custodian banks and fund administrators, who will then format it according to what the final standards look like.
Furthermore, most of these service providers will probably have the required data anyway, in addition to the scalability and technology systems absent at a lot of asset managers. Many service providers are accelerating their FinTech capabilities through heavy investment into big data processing. Forward-thinking providers which have developed sophisticated big data offerings are likely to be the net winners if they create solutions for asset managers to meet their inevitable, new transparency obligations….whatever they may be.