Here's the problem with the FCA's asset management review

Do you remember the day the "Flat white" first emerged on the high street? No, nor do I.

But I do recall wandering into one of the major coffee houses a week or so after one of their competitors had introduced it to see what could only be described as a glorified post-it note with the words "we sell flat whites" handwritten on it.

Within a few weeks, this had been replaced by a new menu board. A few months later, I doubt there was a coffee house in the land that didn't offer a flat white.

This is how competition should work. A company enters a market with something the consumer wants and sees its business benefit. Just as importantly, competitors watch each other like hawks, and if they see one grabbing market share, they respond by improving their customer offering.

Unfortunately, this aspect of competition seems to have bypassed the Financial Conduct Authority's (FCA) thinking in its asset management market study.

Disclosure and independent governance

The FCA basically offers two immediate solutions to improve consumer outcomes. The first is disclosure. Now, no-one can argue that consumers should not be properly informed about their investment. But the blunt fact remains that most consumers don't use the information they have at present. This is not to argue against reform, but simply to acknowledge its limitations.

The other is independent governance, the idea of appointing independent directors to authorised fund managers with a specific duty to consider the value-for-money proposition.

Personally, I think the FCA has underestimated the difficulties here. Unpalatable as it may sound to consumers, directors of asset management firms cannot always put customer interests first. Directors of companies owe their duties, first and foremost, to the shareholders of the company, not their customers.

UK company law (rightly) has some tough rules requiring directors to avoid placing themselves in a position of a conflict of interest. Quite how these new directors of authorised fund managers will reconcile their duties to shareholders, and these duties to consumers, remains to be seen.

The strong case for investment companies

Of course, for investment companies these issues do not arise. Their shareholders and their customers are one and the same, and the board can place their interests first without any of these inherent conflicts. So, they can negotiate reduced fee rates as the fund grows which, as the FCA notes, is so conspicuously absent in the open-ended world.

They also outperform their benchmarks far more regularly over the medium and long term, another area of concern for the FCA.

So what was the FCA's response on investment companies, which embody the independent governance it would like to see elsewhere and deliver better returns for investors? Simply to suggest that any new rules for open-ended funds might also be introduced for investment companies. Hardly an incentive for others, is it?

The adviser market

Rather like the flat white, what we need is to make sure that funds that offer something better for consumers benefit from increased demand.

We have argued that the FCA should look again at the adviser market. Since the retail distribution review, we have seen purchases of investment companies via platforms nearly quadruple to close to £800 million a year, but they still account for less than 1% of all purchases made by advisers (currently running at more than £100 billion a year).

Advisers' reluctance to recommend investment companies often stem from concerns or misunderstandings over their regulatory duties rather than what will deliver the best long-term outcomes for their clients. In many cases, what is required is not a change to the rulebook but simple clarity over what the FCA expects of advisers.

So we will continue to press the case, and hope to speak with the FCA soon about how investment companies could drive competition in the funds sector in the consumer interest. Maybe over a cup of coffee.

Ian Sayers is chief executive at the Association of Investment Companies.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise.The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.