ASIC has dipped its toes into industry-wide competition reviews, engaging Deloitte Access Economics (Deloitte) in early 2020 to carry out an independent review of competition in the Australian funds management industry (the Review). While the Final Report is due in June 2021, ASIC released Deloitte’s Interim Report in March 2021. This found that the managed funds industry is competitive[1] while highlighting some areas where concerns have been raised or where competitive outcomes might improve: barriers to entry and market access; conflicts of interest; transparency of pricing and performance; and investor decision-making and associated outcomes.[2]
The Review is the newest stage for the ongoing tussle between the Council of Financial Regulators (CFR) members, the ACCC, and the Productivity Commission over responsibility for ensuring competition in the financial sector.[3] While the broader ramifications of the Review for this tussle remain to be seen, one reading of the Interim Report is that ASIC’s ‘why not litigate?’ strategy is unlikely to immediately evolve into a large-scale ‘why not regulate?’ ASIC strategy for competition in the Australian funds management industry.
Background: ASIC Dips its Toes into Competition
The Tussle for ‘Competition Champion’ in the Financial Sector
Relevantly, the 2014 Financial System Inquiry: Final Report made two recommendations (among others), in response to its finding of regulatory complacency about competition in Australia’s financial system during and after the GFC[4] (see our previous article on these recommendations here):
- It recommended that the Government review the state of competition in the financial sector every three years.[5] In response, the Government agreed to task the Productivity Commission to review the sector in 2017.[6]
- It also recommended the inclusion of competition in ASIC’s mandate.[7]
In June 2018, the Productivity Commission released its Final Report on Competition in the Australian Financial System. It found that ‘competition must be given serious consideration when regulators intervene in financial markets’ but ‘no Australian financial system regulator has the responsibility of putting competition first’.[8] It recommended that the ACCC become a permanent member of the CFR as the ‘competition champion’ for the financial sector.[9]
ASIC was also considered by the Productivity Commission as a potential competition champion. However, the Productivity Commission heard that ‘both stakeholders and ASIC itself appeared to have reservations. ASIC did not express any active interest in taking on such a role’.[10] Treasury also suggested that it already fulfilled the role of competition champion in CFR meetings. However, the Productivity Commission rejected Treasury’s suggestion based on Treasury’s wider mandate to develop advice for government.[11]
Despite this, CFR members concluded that the appropriate competition champion was the Treasury (continuing to consult with the ACCC where appropriate), denying permanent membership to the ACCC.[12] The Government also introduced a competition aspect to ASIC’s mandate in October 2018, inserting in section 1 of the Australian Securities and Investments Commission Act 2001 (Cth):
(2A) Without limiting [the objects in s 1(2)], ASIC must consider the effects that the performance of its functions and the exercise of its powers will have on competition in the financial system.[13]
ASIC Dips its Toes into Competition
On 28 August 2019, the then-ASIC Chair, James Shipton, announced that ASIC would be assessing competition in the Australian funds management industry.[14] That year, ASIC listed as a new Project in the ASIC Corporate Plan for 2019 to 2023:
Assessing the level of competition in the funds management industry, and the appropriate regulatory response to improve the quality of competition.[15]
The Terms of Reference for the Review also highlight ASIC’s new explicit mandate to ‘consider the effects that the performance of its functions and the exercise of powers will have on competition in the financial system, including the funds management industry’.[16] ASIC engaged Deloitte to undertake an independent review,[17] publishing Deloitte’s Interim Report in March 2021.
Findings from the Interim Report
The Interim Report makes 9 findings in total. Particularly relevant for competition in the managed funds industry, the Interim Report found:
- The managed funds industry is competitive, as evidenced by new market entrants, innovation, and low fees by global standards (Finding 2).
- Funds are differentiated across a range of dimensions. Retail investors have different preferences over these dimensions (Finding 3).
- Investors are sensitive to the performance of funds. Economic transaction costs affect investors’ decisions to buy, sell and change managed funds. These transaction costs are not always transparent and may lead to investors remaining in underperforming funds (Finding 5).
- Retail investors are not highly engaged with funds management. There are many intermediaries between fund managers and retail investors. This long, complex value chain creates issues regarding incentive alignment, transparency and conflicts of interest. This is despite the apparent competitiveness of the funds management market itself (Finding 6).
- There is competition between fund managers on fees and discounts. However, retail investors may not receive the full benefits of competition over discounts. This is a result of principal-agent problems and a lack of transparency (Finding 7).
- Some participants in the managed funds industry have conflicts of interest. This could affect outcomes for retail investors (Finding 8).
- There are legal and structural barriers to entry. In addition, distribution channels and other supply chain participants can create barriers to entry, reflecting both commercial considerations, such as technology functionality, and regulatory considerations, such as required due diligence (Finding 9).
The Interim Report also highlighted four key areas for potential improvement to competition. These were: (1) barriers to entry and market access; (2) conflicts of interest; (3) transparency of pricing and performance; and (4) investor decision-making and associated outcomes.[18]
Where to from here: Will ASIC Sink or Swim as Competition Champion?
The Interim Report suggests that despite ASIC’s initial reported reservations as ‘competition champion’,[19] ASIC is (at least to some extent) engaging with its new competition mandate.
However, given Deloitte’s finding that ‘the managed funds industry is competitive’, it is difficult to see how the Interim Report could be used to justify broad regulatory intervention from ASIC to improve competition in the managed funds sector. Perhaps even ASIC has come to terms with this conundrum: the project titled ‘Competition in funds management’ no longer makes an appearance in the ASIC Corporate Plan for 2020 to 2024.
It remains unclear how ASIC’s new competition mandate will affect the exercise of its powers. Moreover, with regards to the ongoing tussle between regulators, it remains unclear:
- Whether ASIC will continue to take steps to become the ‘competition champion’ in the financial sector, in light of their new mandate;
- Whether the ACCC will take on a more leading role; or
- Whether there will remain a blurry overlap between regulators for responsibility of ensuring competition in the financial sector.
Nevertheless, at least one reading of the Interim Report is that ASIC’s ‘why not litigate?’ strategy is unlikely to immediately evolve into a large-scale ‘why not regulate?’ ASIC strategy for competition in the Australian funds management industry.
Image credit: Australia dollars by Will / Flickr / CC BY-SA 2.0 / Remixed to B&W and resized
Footnotes
[1] Deloitte, Competition in Managed Funds – Interim Report (Interim Report, March 2021) vii.
[2] Deloitte, Competition in Managed Funds – Interim Report (Interim Report, March 2021) x.
[3] See, eg, Productivity Commission, Competition in the Australian Financial System (Final Report No. 89, June 2018) 15–19.
[4] David Murray et al., Financial System Inquiry (Final Report, November 2014) 237.
[5] David Murray et al., Financial System Inquiry (Final Report, November 2014) 254.
[6] See Productivity Commission, ‘Inquiry into Competition in the Australian Financial System’ (Consultation paper, 8 May 2017) Attachment A (Inquiry Terms of Reference) <https://www.pc.gov.au/inquiries/completed/financial-system/consultation/consultation-paper-financial-systems.pdf>.
[7] David Murray et al., Financial System Inquiry (Final Report, November 2014) 254.
[8] Productivity Commission, Final Report on Competition in the Australian Financial System (Inquiry Report No. 89, 29 June 2018) 15.
[9] Productivity Commission, Final Report on Competition in the Australian Financial System (Inquiry Report No. 89, 29 June 2018) 16–17.
[10] Productivity Commission, Final Report on Competition in the Australian Financial System (Inquiry Report No. 89, 29 June 2018) 17.
[11] Productivity Commission, Final Report on Competition in the Australian Financial System (Inquiry Report No. 89, 29 June 2018) 18.
[12] Reserve Bank of Australia, Financial Stability Review (Report, October 2018) 73 <https://www.rba.gov.au/publications/fsr/2018/oct/pdf/box-e.pdf>.
[13] See Treasury laws Amendment (Enhancing ASIC’s Capabilities) Act 2018 (Cth) Sch 1.
[14] James Shipton, ‘Keynote address – Financial Services Council Summit 2019’ (Speech, Financial Services Council Summit ‘Shape your industry’, Sydney, 28 August 2019) <https://asic.gov.au/about-asic/news-centre/speeches/keynote-address-financial-services-council-summit-2019/>.
[15] ASIC, ASIC Corporate Plan 2019–23 (Report, ISSN 2205-5908, August 2019) 32 <https://download.asic.gov.au/media/5248811/corporate-plan-2019-23-published-28-august-2019.pdf>.
[16] ASIC, ‘ASIC Market Study Consultancy – Funds Management Industry Terms of Reference’ (Media Release No. 5727060) [5] <https://download.asic.gov.au/media/5727060/terms-of-reference-review-of-competition-in-the-australian-funds-management-industry.pdf>.
[17] ASIC, ‘Review of competition in the Australian funds management industry’ (Website, Competition in the funds management industry, 5 March 2021) <https://asic.gov.au/regulatory-resources/funds-management/review-of-competition-in-the-australian-funds-management-industry/>.
[18] Deloitte, Competition in Managed Funds – Interim Report (Interim Report, March 2021) x.
[19] Productivity Commission, Final Report on Competition in the Australian Financial System (Inquiry Report No. 89, 29 June 2018) 17.
