The Financial Conduct Authority flagged its intention on Thursday after announcing it was going ahead with a similar probe into investment and corporate banking services following a broad market review.

Despite many competing asset management firms and low barriers to entry into the industry, average profitability is high in the sector which earns 13 billion pounds ($20 billion) in fees annually.

As governments want consumers to save more for their pensions, they have been increasingly looking into fees charged by management funds which, in some cases have been seen to swallow a chunk of investment gains.

"Where fees and charges are not transparent or linked to the costs incurred, it may be difficult for clients to assess whether they are getting value for money," the FCA said.

A basis point of cost savings would be worth about 540 million pounds a year for customers and requiring extra disclosures may not be enough, it added.

The watchdog said "closet tracking" funds, or funds that say they are actively managed but effectively mimic a benchmark stock index, could indicate a "misalignment" between asset managers and their customers.

Actively managed funds charge higher fees than funds that openly track an index.

FCA also found that competition may not be working effectively in third party services such as safekeeping of assets or custody.

"We consider that the wholesale purchase of asset management, and related services, would be a suitable candidate for a market study," it said.

The study would come once the FCA can assess to what extent identified competition issues are resolved by pending European Union rule changes.

Meanwhile, the watchdog announced on Thursday it won't conduct a competition probe into market infrastructure, the third sector that was part of its sweeping review of markets last year, as new EU rules known as MiFID II would tackle most of the issues raised by the review.

FCA also said it would not continue researching the potential for data providers to exploit their market power, or the effect of high pay within the financial sector.

The Institute of Directors urged the FCA to push ahead with a competition probe into fund management as a priority, saying greater clarity is required about fund managers' pay, fees, and voting records on pay deals for executives at companies whose shares they hold.

(Reporting by Huw Jones; Editing by Jon Boyle and Liisa Tuhkanen)

By Huw Jones