Fee Transparency in the Buy-Side: A New Compliance Challenge?

When it comes to data governance in the buy-side, 2017 is already set to be a critical year, as asset managers busy themselves preparing for the application of the EU Benchmarks Regulation and MiFID II in 2018. However, recent reports suggest that fee transparency might be emerging as yet another compliance challenge for asset managers.

Towards the end of last year, the UK’s Financial Conduct Authority (FCA) issued its interim report on the country’s asset management sector. In its report, the FCA indicated that it wants asset managers to do more to demonstrate how they’re delivering value-for-money to clients.

The FCA’s plan is to establish oversight boards for mutual funds, which would act independently to scrutinize fees. Alternatively, the FCA has suggested that trustees or fund depositories could be used to assess whether asset managers are delivering adequate value. The FCA is currently running an industry consultation on this issue and will publish its final plans in March.

There’s a belief that there could be several interlinked consequences of any future action by the FCA. The immediate impact will likely be increased reporting requirements for buy-side firms. As mentioned, asset management firms are already having to adapt to a raft of new regulations that are impacting their sector, in the process creating the greatest regulatory burden buy-side firms have ever faced. Further demands along the lines outlined by the FCA may therefore lead to higher compliance costs for firms.

Second, the trend towards greater fee transparency will mean asset managers will need to dig deeper into their businesses to be able to understand their own costs fully, and report on them accurately. However, in some areas the costs borne by asset managers can be difficult to assess, particularly when it comes to the total cost of firms’ benchmarks data. If not mitigated, this opacity can add further complexity to buy-side compliance efforts.

Finally, greater fee transparency might lead to an increase in price competition in the sector. If this happens, asset management firms will need to be able to manage costs more effectively to create a competitive advantage, and this will include the costs associated with data ownership and management.

From RIMES’ perspective, the push for fee transparency could see increasing numbers of asset managers look to compliance and management services as an alternative to in-house systems. Managed compliance services enable firms to easily meet any increase in reporting requirements that result from regulation. Meanwhile, managed data services remove opacity around data costs, while also reducing the total cost of data management. This allow firms to report more accurately and set competitive fees.

The trend towards transparency and customer-centricity in financial services is a global one, so firms that operate outside the UK should follow developments here closely. RIMES’ view is that if fee transparency does emerge as another compliance challenge for asset managers the means are already at hand to overcome it, and to help firms become more efficient and competitive than ever.

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