The Asset Management Market Study is "probably the most significant piece of competition work the FCA has undertaken to date", the regulator's director of strategy and competition Christopher Woolard has said.
Addressing the annual conference of the Tax Incentivised Savings Association, Woolard (pictured) said the findings of the study, the interim report of which was published on 17 November, point "to a need for reform".
He continued: "For asset managers, we understand the report and its interim findings are challenging. We also appreciate the commercial complexity they are operating under. And the complexity of the policy environment.
"So one point I want to stress is that we see the report as indicative, first and foremost, of a market failure in the economic sense. This has been about observing competition, not searching for rule-breakers.
Woolard went on to stress the FCA expected "the industry to engage positively with the analysis", adding: "Asset managers are entrusted with a very clear social responsibility to the nations' savers - our job as the regulator is to make sure it is an efficient and effective market that serves the interests of these savers."
According to Woolard, the "top line finding" of the report was there was weak price competition in a number of areas of the industry, the result of which is that "investors are paying more than they should for asset management services, which in turn is having a material impact on their investment returns".
In response to the issues identified in the report, said Woolard, the FCA has come up with "a package of proposed remedies" that are intended to:
* bring greater transparency and clarity to pricing - through the introduction of an all-in charge and standardised disclosures;
* bring greater clarity to the duties of fund managers to act in the best interests of investors, and hold them to account for this; and
* give consumers and institutional investors a clearer sense of the strategy they are investing in.
Woolard added the FCA was, for the first time, proposing to use its powers to make a market investigation reference under the Enterprise Act to the Competition and Markets Authority on the institutional investment advice market.
One of the competition issues highlighted by the report, Woolard said, was that many funds are priced at 1.0% and 0.75%, suggesting "there is a ‘going rate' for much of the industry".
He added: "The average operating margin of firms was some 36% across the six-year sample we took. By comparison, the average across all firms in the FTSE All-Share was 16%.
"The persistent nature of these levels of profit raises concern that price competition is not as strong and effective as it should be. From our perspective, this all points to the fact there is greater room for efficiency and value for investors."
Woolard also noted the report's conclsuions there was no clear relationship between price and performance and that there are a significant number of funds that take only modest positions yet charge a high price for them.
"This is not a case of active versus passive," he continued. "But what we are saying is that investors should get what they pay for - or, to put it another way, they shouldn't overpay for what they receive."
The chairman worries about finance getting in touch with its feelings
Cost of acquisition: £31m
Greg Camm temporary replacement
Plan ahead … do not rush
Adviser use of social media on the up