Response to CP17/18: Consultation on implementing asset management market study remedies and changes to the FCA Handbook

The active asset management industry was the subject of a tough interim market study by the UK regulator – the Financial Conduct Authority (FCA) – in November 2016. At the time, many in the industry interpreted the AMMS interim report as suggesting that the FCA had a preference for lower cost passive fund products such as exchange traded funds (ETFs) and index trackers compared to active management.

New City Initiative (NCI) was reassured to read in the final FCA AMMS report that the regulator clarified its position on this matter, stating that it was never its intention for there to be any preference for passive products. This was a very welcome development for

NCI, which had pointed out in its response to the AMMS report that passive products – whilst having a place within some investor portfolios – were not without flaws.

Although offering lower fees, NCI highlighted that passive products are more exposed to equity market corrections than active management. We also articulated that while passive funds had delivered strong performance, these returns had been generated in highly favourable macroeconomic conditions (i.e. a 10-year equity bull run).

“The obvious benefit of active management is that it gives asset owners the opportunity to generate returns above and beyond the market. Good active managers can do this by applying thoughtful insight into market dynamics, an ability to identify discrepancies in the wider universe of opportunities and through effective execution. These elements are not something which passive providers can offer,” said an emerging markets equity manager.

The general tone of the FCA’s latest paper was positive and pragmatic and many in the active management community welcomed the decision not to refer the industry to the Competition and Markets Authority (CMA). “My outlook on the final report was that it was far more of a comforting read than the interim publication. It appeared far less antagonistic, and was broadly fair in what it was saying,” said an NCI member. Another NCI member concurred. “By and large, it was a very comprehensive report,” he said.

In this paper, NCI outlines its recommendations in response to the main points raised in the FCA report. As part of this paper, NCI has consulted with members that represent different investment management strategies, encapsulating the diversity of our constituents, in order to obtain their feedback on the FCA’s report. This paper has been submitted to the FCA.

Jamie Carter

Chairman, New City Initiative Chief Executive, Oldfield Partners