Passive investment vehicles in the UK, including exchange traded funds (ETFs), are set to benefit from a key regulatory report released by the country’s financial regulator last week.
The Financial Conduct Authority (FCA), which is responsible for the regulation of the financial services in the UK, published a Final Report on its Asset Management Market Study on Wednesday 28 June.
The paper, which followed the regulator’s Interim Report published in November 2016, incorporated feedback from the UK’s £7trn asset management industry on a number of measures proposed to improve competition and outcomes for end investors.
The FCA proposed a raft of measures, including ensuring that investors are receiving value for money; ramping up fund governance by requiring asset managers to have at least two independent directors on their boards; and passing on risk-free box profits to investors – all measures that are expected to create extra costs for the industry, with active managers likely to be hit particularly hard.
Meanwhile, the regulator is also pushing for a so-called ‘all-in’ fee on active funds, which would encompass the ongoing charges figure (OCF) and an estimate of transaction charges for the year ahead.
Benefits for ETFs
Although the regulator has stressed it is not recommending passive funds over active, many industry participants are expecting the new rules to benefit passive fund providers and drive investors into trackers and ETFs.
Commenting on the regulatory paper, Moody’s said: “We believe the FCA’s proposals could accelerate investors’ shift away from actively-managed funds towards passive fund solutions, including ETFs.”
The driving forces behind this shift would be the regulator’s calls for greater transparency of investment products, which is already present in the ETFs space, as well as lower fees and greater value for money for the end investor, which many ETF solutions offer.
The FCA will consult further on a number of its proposals, so the implementation of the final rules will happen in stages, but with other regulatory deadlines, such as MiFID II, fast approaching, there is reason to believe ETFs will make further gains at the expense of active funds for the foreseeable future.
In the first quarter of this year, investors have already allocated some $98bn to ETFs, which expected to rise to $390bn for 2017, more than the combined total of the two previous years, according to Goldman Sachs.
ETFs and ETPs listed in Europe have gathered $53.21bn of net inflows year-to-date, according to ETFGI, over three times the amount collected during the same period last year of $17.60bn.
With pressures mounting on the active fund industry, ETFs are likely to take in even more assets as time goes on.