The Financial Conduct Authority's (FCA) new rules requiring authorised fund managers (AFMs) to assess the overall value that their funds deliver to investors and to publish an annual summary of these assessments come into force in September, with the first reports due in January 2020.
AFMs will need to make sure they are prepared for the new rules, as this is the first time they will have to justify their pricing and consumer outcomes publicly. The FCA is also introducing individual accountability for a firm’s assessment of value under the Senior Managers and Certification Regime – the first time it has done this in any sector.
The FCA is increasingly focusing on economic outcomes for retail customers in UK financial services. With more retail investors exposed to the asset management industry than ever due to the rise of defined contribution pension schemes, this industry is a prime target for FCA scrutiny. The FCA found in its market study that asset managers earned an average profit margin of 36% over a six-year period - among the highest in the UK economy – and it did not find any clear relationship between fund charges and fund performance. The FCA concluded that poor value products were causing harm to investors.
So, will the FCA’s new regime work? Will it weed out poor value products, or will the industry simply say that all of their existing products provide good value? We are unlikely to see a huge rush to reduce charges across the board. However, where firms manage funds that have higher charges than the market average for comparable funds but have consistently under performed against their objectives, they may face considerable scrutiny from the regulator and the market.
If the FCA thinks that firms are not producing credible value assessments, it is likely to consider stronger interventions, for example, requiring a majority of independent directors on AFM Boards. In other sectors we have seen the FCA push hard to increase transparency and independent oversight, and if all else fails intervene directly on price.
Our paper Assessing the value that investment funds deliver to investors | Navigating the challenges, explores the FCA’s expectations, the key challenges in assessing value for money, and how firms can best respond to these challenges.
The asset management market study and our supervisory work have shown that in general, AFMs have not considered robustly the value they offer to investors under our existing rules. We believe that this is leading to harm to investors through poor value products.