On Wednesday, the City regulator set out the terms of its inquiry into the sector, which includes £2.1tn of pension fund investments and £1.2tn of retail investment products, such as personal pensions and Isas. The FCA said the industry could face a regulatory crackdown and that it may punish individual firms if necessary.
The inquiry will examine how asset managers compete to provide value for customers, whether they are willing or able to control costs passed on to consumers, and the role of consultants who advise pension funds but also sell them investment services.
The FCA announced in February that it planned to investigate the sector to make sure customers were getting value for the charges they pay to fund managers. The industry has been criticised over many years for high fees that eat into savers’ pensions, even as the government is encouraging people to set aside more moneyfor old age.
The watchdog said it wanted to make sure products were easy to understand, with clear charges that let consumers shop around. The regulator will also examine the expense and difficulty involved if people want to move their money to a different investment manager.
The FCA said: “If we conclude that competition is not working well and there is a need to take action, we may intervene to promote effective competition using a number of possible measures.”
Actions could include new rules, issuing additional guidance for the industry and proposing new self-regulation. Individual firms could be barred, publicly censured, fined or forced to pay compensation to customers.
The FCA may also remove rules that deter new asset managers from setting up and refer matters to the Competition and Markets Authority, the regulator that ensures consumers are not left out of pocket because of weak competition.
The size of the investment management market means a small reduction in total charges would have a big effect on investors’ overall returns, the FCA said. Someone who invested £20,000 for 20 years would be almost £13,000 better off if they paid 0.3% in fees instead of a typical 1.5%, it found.
If competition increased, 14.2 million pension savers could benefit and 11 million retail investors would be better off, the FCA said. The regulator added that it would start gathering information to publish interim findings next summer and a final report in early 2017.