Antitrust Alert: UK Launches Competition Study of Asset Management Market
The UK's Financial Conduct Authority (FCA) has announced that it will undertake, for the first time, a competition market study of the asset management sector. The FCA's objective is to understand whether competition is working effectively to enable institutional and retail investors to get value for their money when purchasing asset management services. This market is a significant one for the UK economy with over £6.6 trillion (US$4.3 trillion) of assets under management, and it has a direct impact on consumers through their retail investments, pension funds and insurance premiums.
The FCA uses market studies as a tool to gather information and assess how competition is working in a market and what, if any, intervention the FCA should make.
The FCA will carry out the study using its regulatory powers under the Financial Services and Markets Act 2000 rather than its competition powers under the Enterprise Act 2002. But the potential outcomes and remedies are essentially the same. The FCA acquired additional powers in April 2015 to enforce competition law directly in the financial services sector and has a wide range of powers to address and remedy the competition or other concerns it identifies. However, it does not have the ability to impose structural remedies (e.g. the break-up of companies). To do so, it would have to refer the market for a full-blown market investigation to the Competition and Markets Authority.
The FCA's options include introducing new or amended financial services regulations (for example reducing a regulatory burden if it constitutes a barrier to entry or expansion), recommending to the UK Government to introduce new legislation, promoting or requiring industry self-regulation, enforcing competition law in respect of any anticompetitive agreements or abuse of a dominant position, or enforcing financial services rules against individual firms.
The FCA already has undertaken a number of market studies into various retail financial services and products, including retirement income, cash savings, credit cards, and general insurance add-ons. This is the second market study into wholesale financial services: the FCA is currently investigating competition in the investment banking and corporate banking sector.
The FCA's draft terms of reference indicate that the current scope of the study is wide, but we would expect the issues to narrow during the course of the study. Notably, the market study will not just cover the role of asset managers but will extend to the whole "value chain," including distributors, platforms, investment consultants, as well as ancillary and third party service providers.
The FCA has identified three key topics for investigation:
- How asset managers compete to deliver value and how investors can make sure they are getting value for money from and monitor the performance of asset managers.
- Whether asset managers are willing and able to control costs and quality along the value chain.
- What effect investment consultants have on competition for institutional asset management, and any conflicts of interest that may exist arising from the provision of advice.
The FCA also will consider the overarching question whether there exist any barriers (including regulatory) to entry, innovation or technological advances. However, the FCA does not consider the industry to be particularly concentrated.
In approaching the question of whether investors are getting value for their money, a key area of scrutiny in the investigation will be the level of fees charged to investors. The FCA said that it considered the level of profitability (average operating profit of 35%) to be quite high globally and in the UK. The FCA will therefore investigate pricing and profitability throughout the value chain. The FCA will also want to understand whether there is sufficient transparency in relation to charges and whether investors can compare charges and performance and act in response to that information, for example, by switching between funds. It will also look at the bundling of some ancillary services which may impact the way competition works for these services.
In terms of next steps, the FCA will send out extensive requests for data and information to market participants and hold roundtables and bilateral meetings. The FCA expects to publish its interim findings in Summer 2016 and a final report with remedies (if required) in early 2017.
For more information, please contact your principal Jones Day representative or either of the lawyers listed below.
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