The financial watchdog is planning a tougher clampdown on UK asset management companies as it feels the sector has enjoyed big profits for many year by not competing very hard on prices and fees, though analysts said the industry will breathe a sigh of relief at the lack of bite from the report.
Among the measures proposed by the Financial Conduct Authority are the introduce of an "all-in fee" to make prices clearer to investors, alongside new reforms to "hold asset managers to account" with a "strengthened duty on asset managers to act in the best interests of investors".
The FCA's probe, which was launched in November in 2015 and could now be referred to the Competition & Markets Authority, found investors in actively managed funds often pay high charges due to what it said was "limited price competition", with costs often "not justified by higher returns".
In what appeared to be an accusation of tacit price collusion, the FCA said, "despite a large number of firms operating in the market the asset management sector as a whole has enjoyed sustained, high profits over a number of years with significant price clustering".
Analysts noted that typical operating margins range between 30% and 40% although some are well above this level.
Andrew Bailey, the new head of the FCA, said: "In today's world of persistently low interest rates, it is vital that we do everything possible to enable people to accumulate and earn a return on their savings which can meet their lifetime needs.
"To achieve this, we need to ensure that competition in asset management works effectively to minimise the cost of investment."
Investment consultants and financial advisers also came under the cosh in the 209-page report for not effective at identifying outperforming fund managers and potential conflicts of interest, with further investigations likely to follow.
Other measures the FCA aims to impose include requiring asset managers to be clear about the objectives of a fund, clarifying and strengthening the use of benchmarks and providing tools for investors to identify persistent underperformance, as well as making it easier for retail investors to move into better value share classes.
Under the new regime, fund management companies will be required to ensure there is clearer communication of their fund charges and their impact at the point of sale as well as in ongoing communication to retail investors, together with increased transparency and standardisation of costs and charges information for institutional investors.
Firms will also need to work with the FCA to explore the potential benefits of greater pooling of pension scheme assets.
"In our view the industry will breathe a collective sigh of relief this morning and may feel like they have 'got away with it', as it could have looked far worse in our view," said analyst David McCann at broker Numis, though he stressed that this was only the interim and not final report.
At first glance, he said the remedies "seem benign" and , mostly about increasing transparency and improving disclosure "which was generally the direction of travel for most in the industry anyway" and with none of the feared more draconian measures such as price caps or significant changes to business practices.
Paul McGinnis at Shore Capital said the eye-catching proposal was the introduction of an all-in fee so that investors can easily see what is being taken from the fund.
"Arguably this already exists in the form of the OCF/TER but the distinction could be that these measures contain certain costs (including transaction costs) that are not known in advance by the investor. Therefore an all-in fee may fix this cost to the investor and let the asset manager bear the risk on the variability.
"Ironically, this could be absorbed into a higher annual management fee but it may be the case that some asset managers choose to absorb more of these costs through the P&L rather than raise management fee rates."