The Future of Market-Based Finance

Asset management is an increasingly global business that is equally affected by policy in multiple jurisdictions. We see that, for example, in the recent strong industry interest in both Brexit and MiFID II. Another particularly significant ongoing development, that deserves more attention in the U.S., are the findings and recommendations of an asset management market study by the Financial Conduct Authority in the United Kingdom; an interim report was published just over a year ago with the Final Report following in June of this year.

The work is ongoing as the FCA develops and refines its proposals. However, SIFMA believes that the overall trajectory of this agenda fails to truly grasp the nature of market-based finance. Without pausing to reflect more deeply, these proposals will damage not just the asset management industry but also the performance of the global economy.

The FCA states their intention is to make markets more competitive and intends to do so by driving pressure to lower fees. However, evidence does not support the study’s findings regarding fees and costs, nor their call for more prescriptive, market inhibiting, top-down policy tools.

Paul Atkins, Chief Executive Officer of Potomak Global Partners and former SEC Commissioner recently argued at SIFMA’s 2017 Annual Meeting that, if the U.K. wants to reduce fund fees, then a top-down approach is not the right way – investors need choice. The FCA would be better off following the U.S.’s disclosure-based approach to fostering competitiveness.

The FCA must also realize that a lack of statistically significant correlation between fees and performance is not evidence of a market failure. Additionally, improving their correlation should not be the focus of policymakers: when given choice, consumers can leave underperforming funds. Further, the FCA’s study focused only on U.K./global/EU large cap equities, and there is evidence in fact that active has outperformed passive in bonds and small caps.

Overall, for policymakers concerned about costs to consumers, a more productive effort would be for the U.K. and U.S. to fend off pressure by global bank regulators to layer bank-like regulation on top of asset managers, which would result in higher costs for retail investors. The U.S., in particular, has implemented hundreds of regulations since the financial crisis, many of which have a direct or indirect impact on how asset managers help investors achieve their financial goals. The cumulative policies governing the future of market-based finance are crucial to the growth of the U.S. and global economies.

Tim Cameron is Managing Director and Head of SIFMA’s Asset Management Group.