The fee pressure being applied by asset managers on their custodians, administrators and depositaries is not going to level out anytime soon, and may arguably accelerate following the publication of the UK regulator’s asset management report.
The Financial Conduct Authority’s (FCA) final report on its AMMS (Asset Management Market Study) was published at the start of April 2018.
The rules will require asset managers to introduce some changes to their businesses.
Concerns about poor price competition across asset management have been flagged by the FCA, and the final report provides instructions to the industry as to how they ensure investors receive good value for money.
Firstly, asset managers have been given an 18-month timetable to notify investors about how they provide value for money. This self-assessment, which takes into account fees and charges, economies of scale and overall service quality, needs to be performed annually and reported to clients. In response, some anticipate that asset managers will try to further streamline their business operations, which could lead to a reopening of forthright fee negotiations with their providers.
“The FCA has always taken a keen interest in fees and costs, and it is a very real possibility that managers will now start applying pressure on service providers in terms of what they are being charged,” said Richard Frase, a partner at international law firm Dechert.
“I suspect we will see managers tightening up on their budgets and overall vendor spend as a consequence of the value for money proposals.”
One UK-based COO at an asset manager acknowledged annual service provider reviews typically factored in costings during the analysis process, although added the FCA’s interest in value for money could give them greater leverage during discussions with vendors. “I think it is possible to argue that [costs] have always been part of the annual review of service providers. However, I suppose [the AMMS final report] is a useful weapon to use during the negotiations,” said the COO.
In addition to its scrutiny over value for money, the FCA has told managers to strengthen their corporate governance. The FCA said there needs to be at least two independent directors on fund boards, a policy which is adopted in Luxembourg and Ireland. Asset managers generally welcomed the FCA’s position on independence.
The FCA has also banned asset managers from generating income through risk free box profits, insisting such revenues be passed down to the fund and its investors. A number of asset managers including BlackRock and Schroders have moved away from taking box profits, and most industry participants concede the practice is unfair and goes against clients’ interests. Some have also argued it is very difficult for investors to properly scrutinise box profits.
Furthermore, the FCA told the funds’ industry that it should be made easier for investors to be switched into cheaper fund share classes. Currently asset managers need client consent to move them into less expensive share classes, something the FCA has confirmed is no longer warranted. A number of asset managers had complained that acquiring client permission to change share classes stopped them from doing it. The next few months could therefore be a busy period for the industry, as it absorbs the FCA’s new rules.