UK asset managers can boost competitive edge with more transparency
WHEN we asked asset managers and investors to name the most important issue facing the sector, the answer was overwhelmingly how clients’ funds are spent through dealing commission.
The growing consensus that more can be done to ensure clients’ funds are used fairly reflects a wider cultural shift across financial services. Firms in all sectors recognise that they must put consumers at the heart of how they do business.
Last year, I set out my long-term vision for asset management – to strengthen the UK’s competitive edge by enhancing its reputation for integrity and transparency. Clients should expect asset managers to manage costs with the same enthusiasm they employ maximising returns on the assets they invest. And the industry can expect our focus to remain on conduct and integrity.
Let’s not forget the reason this matters: the asset management industry safeguards the assets of millions of everyday savers. With newly-agreed European legislation likely to further limit the use of commissions, the Financial Conduct Authority has set out its own proposals for the UK, with clearer rules where services are bundled together.
Since then, we have spoken to 130 firms across the buy-side and the sell-side, and held seven round tables to listen to feedback on our proposals. We are also reviewing how banks, brokers and asset managers use dealing commission. And we are extending the work to cover corporates and independent research providers.
I am pleased to see parts of the sector are starting to put some things right. Some firms already set clear budgets for research, often using execution-only rates or commission-sharing arrangements to manage costs. One firm saved clients around £2.2m per quarter by actively managing research costs.
But there are a number of areas for improvement, particularly where controls over the use of commissions are not up to scratch. We have seen cases where the value of the research bears little relation to the commission paid by asset managers, with clients in the dark about the benefit they receive.
Where brokers bundle research and execution costs together, asset managers are often unaware of how much each specific element costs, making it almost impossible to assess a “fair” price for research or to justify this cost to their end clients. Frankly, we expect better oversight of the way that research is valued and priced.
Given the value placed on transparency by investors and international markets, firms who can demonstrate that they put their clients first, not just say it, will benefit by attracting new business in an increasingly competitive market.
Today marks an important step for the industry, as the Investment Management Association publishes its own contribution to this debate. We will set out the results of our consultation and review later this year.
The UK is poised to gain a decisive competitive edge in a global market. It is vital that regulators and industry continue to work together to get it right.
Martin Wheatley is chief executive of the Financial Conduct Authority.