The UK Financial Conduct Authority is wrapping up a two year investigation of the money management industry in this important global financial center.
Despite heavy industry lobbying which has squelched similar inquiries in the US, the FCA’s just-released preliminary report is an indictment of many traditional industry practices. Excessive fees, lack of disclosure and conflicts of interest among asset managers and pension consultants are recurring themes. The Financial Times, which seems to me to be in the best position to know, thinks that the “good” news for the industry is that the FCA has not recommended a government investigation of its practices for potential breach of UK law.
Although the investigation began before Brexit became a reality, it occurs to me that the FCA’s conclusions are being shaped by the idea that UK investment services no longer need simply meet the (very) low bar of being better than what’s available in the rest of the EU. Without a built-in clientele, services must also be good in an absolute sense. A regulatory regime that gives investors a fair shake is a sine qua non–as well as miles better than what is generally the case elsewhere, including in the US, the current market leader.
The FCA investigation has two implications I can see for US-based money management:
–increased disclosure of fees/performance in the UK will increase pressure for similar disclosure in the US. One particular bone of contention is the use of “soft dollars” or “research commissions,” meaning a management company pays a broker, say, 2x the going rate for a portion of its trading. In return it receives goods/services that the manager would otherwise have to pay for from management fees. The kinds of stuff a manager can receive is already regulated in the US, but disclosure of the amount of money in extra commissions ultimately being paid by clients is not. The FCA will require such disclosure in the UK. My sense is that the amounts will be surprisingly large.
–during the years prior to the financial meltdown, US banks opened London branches to process transactions–often involving US buyers and US sellers of US products–that were allowed in the UK but illegal domestically (think: sub-prime mortgage derivatives). This was a result of the UK’s decision to build up its financial services industry using a “regulation lite” approach to governance.
In the absence of any changes to US laws, why wouldn’t large US institutional investors demand that their investment managers similarly conduct business out of London. In this case, however, it would be to obtain lower fees, greater transparency and better legal recourse in the case of disputes.
Yes, this sounds a little crazy, but the legacy investment management industry–both managers and consultants–are so powerful that I think favorable change for investors is unlikely to happen otherwise.