FCA Fires Warning Shot to PE and Hedge Fund Managers The FCA last week unveiled ambitious plans to stimulate competition in the asset management industry and strengthen investor protections as they fire warning shot to PE and hedge fund managers. Whilst these plans relate mainly to the managers of retail funds, certain measures may affect private equity and hedge fund managers \u2013 in particular, those relating to the disclosure of costs and charges. Overview In its final report on the Asset Management Market Study, published on 28 June 2017, the FCA confirmed its earlier findings that: \tprice competition is weak in a number of areas of the asset management industry \tthere is no clear relationship between charges and performance \tpast performance information is of limited value \tthere is a lack of clarity in the communication of asset managers\u2019 objectives \tinvestors\u2019 awareness and focus on charges is often poor \ta near oligopoly (coupled with a weak demand side and low switching rates) and conflicts of interest present significant concerns in the UK investment consultancy market \tthe benefits of retail investment platforms are questionable Our briefing on the FCA\u2019s interim report can be found here. The FCA proposes to deal with these issues through a package of remedies, some of which are the subject of a concurrent consultation exercise (see CP17\/18), some of which will be the subject of a future consultation exercise and some of which are final remedies requiring no further consultation. The proposed remedies are designed to support and complement various other regulatory initiatives affecting asset managers, including MiFID II, PRIIPs and the Senior Managers and Certification Regime (SM&CR). Remedies To provide protections for investors who are not well placed to find better value for money, the FCA proposes: \tto strengthen the duty on investment managers to act in the best interests of investors through clarifying its expectations around value for money and increasing accountability through the SM&CR \tto impose a requirement that fund managers appoint a minimum of two independent directors to their boards \tto require fund managers to return any risk-free \u201cbox profits\u201d to the fund and disclose box management practices to investors \tto introduce measures to make it easier for fund managers to switch investors to cheaper share classes To drive competitive pressure on asset managers, the FCA will: \tcontinue to support the disclosure of a single all-in fee to investors \tsupport consistent and standardised disclosure of costs and charges to institutional investors by convening a group of industry and investor representatives to agree a template of costs and charges \tchair a working group to focus on how to make fund objectives more useful and consult on how benchmarks are used and how past performance is reported \trecommend that the Department for Work and Pensions continue to review and, where possible, remove barriers to pension scheme consolidation To improve the effectiveness of intermediaries, the FCA will: \tseek views on rejecting the undertakings in lieu of a market investigation reference to the Competition and Markets Authority (CMA) provided by Aon Hewitt, Mercer and Willis Towers Watson (the market investigation reference in question concerns investment consultancy services) \trecommend that the Treasury considers bringing investment consultants into the regulatory perimeter \tlaunch a market study into investment platforms to look at how competition is working in that market Commentary Anyone in the asset management industry hoping for a post-Brexit \u2018bonfire of the regulations\u2019 will be disappointed with the direction of travel contemplated by FCA. The headline-grabbers from the 112-page report have been the FCA\u2019s commitment to the all-in fee, the requirement that managers have two independent directors on their boards, the proposed ban on risk-free \u201cbox profits\u201d and the recommendation that investment consultants be brought within the regulatory perimeter. None of these measures will directly impact private equity and hedge fund managers (other than those managing UCITS funds). Of more relevance are the proposals relating to the disclosure of costs and charges to institutional investors.\u00a0 The FCA noted that private equity and hedge funds were \u201cparticularly opaque\u201d in this respect. MiFID II is introducing significant changes in this area, by requiring pre-contractual information on costs and associated charges to be provided to clients, followed by an annual disclosure of actual costs. In this context, the FCA continues to support the development of a standardised disclosure template and will convene a group of key stakeholders to drive this forward.\u00a0 Previous attempts at imposing standardised templates for private equity managers have had only limited success, despite the best efforts of the likes of the International Limited Partners Association.\u00a0 It remains to be seen whether the FCA\u2019s initiative will yield better results. At present, these requirements will only apply to managers carrying on MiFID business, including full-scope AIFMs carrying on portfolio management or other MiFID activities under article 6 of the AIFMD. However, the FCA\u2019s observations about private equity and hedge funds (in a report which ostensibly had nothing to do with those sectors) may presage greater regulatory focus on the alternatives space. Such a move would be consistent with international experience: fee disclosures by private equity managers has been an area of focus for the SEC (as evidenced by the recent Apollo, KKR and Blackstone settlements last year, for example) and where the SEC goes, the FCA invariably follows. Managers \u2013 you have been warned.