The calls for regulation came during the FCA review of the asset manager market, which was published today.
Several ratings agencies responded to the FCA’s asset manager investigation and “acknowledged that there are conflicts within some of their business models, but argued that they manage these effectively”.
The FCA said other respondents were “more concerned that conflicts distort the effectiveness of ratings, and therefore consumer choice and outcomes”.
The FCA report stated: “The lack of negative ratings was cited as evidence that the ratings are biased. Some felt that the visibility of passive funds and fund coverage more generally could be increased by ratings agencies to the potential benefit of consumers.
“To ensure fund ratings work in the interests of consumers, some respondents called for the fund ratings industry to be regulated. There were calls for specific interventions in the market, such as RDR type rules preventing payments from asset managers to fund ratings companies.”
As part of the Investment Platforms Market Study, which will begin soon, the FCA said it will “assess the extent to which platforms are dependent on third party fund rating firms”.
It will look at how platforms ensure any conflicts of interest do not affect the quality of information they make available to investors and financial advisers.
Officials said: “We will consider if further action is needed as a result of this.”
Some of these issues will be covered in the FCA market study into investment platforms. This will explore how ‘direct to consumer’ and intermediated investment platforms compete to win new and retain existing customers.
The FCA’s interim report outlined findings on whether best buy lists add value by helping consumers identify funds that perform better than those which are not on a best buy list.
Some fund rating providers questioned the evidence used for this and cited internal research, which they said, proves the value of their ratings.
Respondents suggested that the FCA conducts more work on the following areas:
• conflicts of interest in the business models of ratings
providers
• clarity on the purpose of ratings and their subsequent performance
• ratings of passive funds
• fund coverage by ratings companies
• for advised investments, the lack of alignment between who benefits from ratings
The report added: “We agree that fund ratings can have an impact on how investors choose products and they are likely to play an important role in competition for asset management products. They can also have a positive effect on competition where any conflicts are managed effectively.”