The FCA Asset Management Market Study (Interim Report) released on 18 November 2016 advocates “all-in-fee” schemes as a way to improve price competition and investor outcomes

Fixed expense schemes have been growing in prevalence in the UK and other core fund locations across Europe in recent years. The advocacy of “all-in-fees” by the FCA is reflective of this growing trend.

Background

  • On 18 November 2016 the FCA published its ‘Asset Management Market Study – Interim Report’. The report reinforces the duty of asset managers to act in the best interest of investors and, among a portfolio of findings and guidelines, identifies weak price competition and standardisation and transparency of fees as key industry issues
  • Despite an acknowledgement that competitive pressures are building in some areas of the market, the FCA believes that there is room for improvement for both institutional and retail investors. In particular, the report highlights the need for clearer communication on fund charges, and the duty of asset managers to pass on related economies of scale to investors
  • The FCA report advocates asset managers introducing “all-in-fees” such that investors can easily see what is taken from the fund, can be aware of related costs before investing and can more readily make comparisons between products. To further support these objectives, the FCA also advocates an ex-ante announcement of the “all-in-fee” level prior to the beginning of the year
  • The alignment or otherwise of the UK “all-in-fee” to the UCITS approach to fund expenses (OCF) will ultimately be determined by the composition of the “all-in-fee” that is defined by the FCA. This is yet to be determined and is dependent on the results of subsequent consultations; no conclusions can yet be firmly drawn as to whether the proposed all-in fee would be at odds with EU regulations
  • The industry has seen fixed expense schemes becoming increasingly prevalent in recent years for UK and Ireland domiciled funds, and in Luxembourg such schemes have been the industry norm for more than a decade

Why is it important for our clients?

  • The report issued by the FCA makes clear the proposal for UK asset managers to move to ex-ante defined “‘all-in-fee” schemes
  • Implementing such schemes necessitates significant operational and finance changes for those managers not currently employing a fixed expenses model
  • The ex-ante aspect of the FCA guidance represents a particular challenge for asset managers. In order to mitigate the financial risk of defining fund costs prior to the beginning of a fiscal year, actual expenditures against defined levels must be closely and accurately monitored by managers
  • Should “all-in-fee” schemes become the standard, managers will need to ever more closely monitor competitive positioning on price, given that increased ease of comparison for investors will likely drive more cost-based competition
  • Establishing a volume discount mechanism as part of an “all-in-fee” will also allow managers to demonstrate economies of scale are being passed on to investors

How can Alpha help?

Since 2012 Alpha has successfully assisted numerous asset manager clients in the UK, Ireland and Luxembourg with their fixed expense schemes. This includes:

  1. Performing impact analysis for operational, financial and product development departments
  2. Defining and implementing fixed expense schemes for asset managers, including scenario based planning to set fixed fee levels and the introduction of volume discount mechanisms
  3. Post-implementation monthly monitoring of expenses and competitive positioning to make sure that the financial risk is mitigated and fees are market competitive. This is typically undertaken at share-class level

“Fixed expense schemes has been a direction of travel already taken by a significant number of managers in the UK and other European fund centres in recent years. We have successfully assisted a cross-section of our asset manager clients with their related objectives, and bring a deep understanding of how best to assess and deliver such schemes.”

 

Duncan Spencer, Alpha Director