The FCA has confirmed it is looking at key regulatory issues that could arise from the trend toward passive investing.
In its annual report released yesterday, the FCA notes it has already published academic work on trends towards passive in the UK.
The City watchdog said it is now leading an International Organization of Securities Commissions workstream, building on its research to date and outcomes of the recent Paying for Efficient and Effective Markets conference, which the FCA co-sponsored with London School of Economics and the Securities and Exchange Board of India.
One issue over passive investing’s rise that has stemmed from scholarly research, that has been globally gaining attention of regulators, is the theory of “common ownership”, where shareholders own significant stakes in competing firms in the same sector.
According to the theory, executives of these companies are less likely to invest in new products and services, when they know their major shareholders have also big stakes in their rivals.
The antitrust concerns of common ownership are even more relevant with the rise of passively managed index and exchange traded funds, in which a limited number of investors can have major stakes in some the world’s biggest companies.
Previously, the US Federal Trade Commission, US Department of Justice, the OECD and European Commission have also dealt with or touched upon concerns arising from the common ownership. In the US, “The Big Three” – BlackRock, Vanguard and State Street – have 80 per cent of the money invested in US index funds between them.
When asked by Money Marketing at the beginning of the year, the FCA said it was not currently doing work on the question of common ownership, but referenced a session at the Paying for Efficient and Effective Markets that dealt with the issue.
In the annual report, the FCA said its work will “help identify and explore the key regulatory issues that the rise of passive investing creates.”