FCA targets competition concerns in the asset management market

On 29 November 2017, the UK Financial Services Authority (FCA) for the first time made use of its competition enforcement powers by issuing a “statement of objections” to four asset management firms alleging that they have colluded on prices in relation to initial public offerings and a share placement in breach of competition laws.

This is the latest action in a series of efforts by the FCA to tackle competition concerns in the UK asset management market: on 28 June 2017, the FCA proposed a wide set of remedies to increase competition and enhance investor protection. It further identified features of the investment consultancy and fiduciary management services sectors that may adversely affect competition. On 14 September 2017, the FCA requested the UK Competition and Markets Authority (CMA) to launch an in-depth investigation into these sectors.

The FCA asset management market study

The FCA’s final report into the UK asset management market of 28 June 2017 identified four key areas of concerns:

• weak price competition in several segments of the market;
• a substantial variation in performance across and within asset classes and no clear relationship between charges and the gross performance of retail active funds;
• lack of transparency of objectives and charges; and
• significant differences in the behaviour and outcomes of different institutional investors.

To address these concerns, the FCA proposed a number of remedies with the aim to empower investors and create a more competitive market. These include strengthening the duty on fund managers to act in the best interests of investors, introducing a single all-in-fee to investors and making it easier for investors to switch between share classes. The proposed remedies are subject to further consultation.

CMA investigation

The FCA also identified competition concerns in the investment consultancy and fiduciary management services sectors. These include a weak demand side due to often limited experiences of trustees, relatively high market shares among the largest investment consultants, barriers to expansion for smaller investment consultants and conflicts of interest where investment consultants provide both advisory and fiduciary management services.

For the first time, the FCA made use of its powers to refer an investigation to the CMA, the UK competition regulator. If the CMA identifies anti-competitive features in the investment consultancy or fiduciary management services sectors, it may impose behavioural and structural remedies and recommend changes to relevant regulations. The CMA will issue its report by no later than 13 March 2019.

The Hong Kong asset management market

The Securities and Futures Commission (SFC) aims to support Hong Kong’s development as a leading global asset management centre. CEO Ashley Alder recently commented that the SFC is monitoring international developments in the asset management industry. Given that Hong Kong introduced a cross-sector competition law regime in December 2015, the SFC will likely pay close attention to the FCA’s and CMA’s recent focus on competition law concerns in the UK asset management market.

It should also be noted that the FCA found a possible lack of awareness of competition law in the asset management industry. Hong Kong asset managers should therefore ensure to have an effective competition compliance strategy in place to manage any competition law risks.