At a glance  

This blog sets out the FCA’s findings and our views on how authorised fund managers (AFMs) have approached the value indicators of performance, economies of scale and quality of service in their fund value assessments.  

The key themes from the FCA’s review include: 

  • Performance: Firms need to consider what investors can reasonably expect given the charges they pay and how the fund has been marketed. For example, some firms assessed active funds against vague fund objectives and concluded that they were good value even though they had underperformed the market.  

  • Economies of scale: Some firms had made little progress in developing methodologies for measuring economies of scale. Some firms incorrectly assumed that existing market rates reflected economies of scale being shared with investors. Firms typically scrutinised management fees less than the fees paid to external parties.  

  • Quality of service: The FCA raised concerns about some firms emphasising intangible matters such as “trust in the brand” rather than quantifiable measures. Some firms had not considered the overall quality of the investment process, while others had not considered how quality of service might vary across funds.  

The key themes from our assessment include: 

  • Performance: While it is interesting to consider a range of metrics, firms should set out up front what they consider to be their primary performance measure. Firms also need to consider how long a fund can underperform for or by how much before it is deemed “poor value”. Where firms apply remedies for poor performance, they should explain in subsequent assessments the extent to which these have been effective. 

  • Economies of scale: Firms should consider economies of scale in individual funds rather than only firm-wide economies. Firms should also assess the merits of introducing break points or tiers. Where firms reinvest savings from economies of scale, they need to demonstrate tangible benefits for investors. 

  • Quality of service: External views such as third-party assessments and consumer surveys can be powerful, as long as consumer surveys are carefully crafted. Quantitative information from internal assessments can also be informative. Where overall quality of service is used to justify underperformance, firms should explain how they have weighted the value indicators and why. 

Whilst the value assessment exercise has brought the concept of value to the industry’s and other stakeholders’ attention, firms need to do more to meet the FCA’s expectations. We expect the FCA to continue to pursue its customer value agenda until it is satisfied that tangible remedies are being applied more broadly and investors have a clearer idea of the value that is being delivered to them. 


Whilst “value” may, like beauty, be in the eye of the beholder, the FCA’s new rules for AFMs use seven concrete indicators (performance, AFM costs, comparable market rates, comparable services, economies of scale, quality of service and share classes) against which fund managers must assess whether their authorised funds are providing value to investors. With the second round of assessments now in train, it is worth exploring to what extent the assessments produced so far have been able to justify the provision of value.  

For a summary of the FCA’s review findings, an overview of how the value assessments have affected the market and our views on all seven indicators, please see our other blog and its accompanying slide pack. 

In this blog, we take a closer look at performance, economies of scale and quality of service. Performance is a particularly important value indicator, since retail investors’ basic interpretation of value is likely to be returns net of costs. It is interesting to note that the Investment Association (IA)'s study of nearly 1,500 funds found that poor performance was a concern in 85% of funds for which firms identified issues with value. The FCA has highlighted economies of scale as being an area of weakness in firms’ assessments. Quality of service is also an interesting indicator because its subjective nature has made it challenging for firms to define and demonstrate. For these three indicators, we discuss the FCA’s review findings and our views on the factors that firms need to consider when completing their value assessment. These points will be particularly relevant to individuals who are responsible for an AFM’s value assessments under the Senior Managers and Certification Regime. 


The FCA’s rules require that “the AFM must, separately for each class of units in a scheme, consider at least… the performance of the scheme, after deduction of all payments out of the scheme property as set out in the prospectus... Performance should be considered over an appropriate timescale having regard to the scheme’s investment objectives, policy and strategy.” 

The FCA’s findings 

A key theme in the FCA’s findings was that firms need to assess the returns that investors actually receive against the returns that that they could reasonably expect given the charges they are paying and how the fund has been marketed. 

A few firms assessed gross performance rather than net performance, so they did not assess the returns that investors actually received. Some firms assessed net performance but only for one share class, typically the wholesale share class with the lowest charges. This meant that potentially poor net performance in more expensive (typically retail) share classes was not being assessed. 

Some firms did not assess performance against what investors might reasonably expect. For example, many active funds assessed value against loosely termed objectives such as “capital growth”, despite the FCA having previously expressed concerns about imprecise fund objectives. The consequence is that some funds can technically achieve their objective whilst still underperforming the market, painting a confusing picture for investors about value. Investors in these funds pay for active management so can reasonably expect them to aim to outperform the market. The FCA said that these funds paid insufficient regard to their investment policies and strategies.   

Similarly, some firms managing multi-asset funds and funds of funds justified fees based solely on the performance of these funds relative to other multi-asset funds or funds of funds. Investors in these funds typically pay a premium compared to other types of fund with the aim of enhancing risk adjusted returns, so it would be appropriate to assess performance compared to other funds with similar investment objectives. 

In addition, some firms justified underperformance which spanned multiple years on the basis that the investment style as a whole had under-performed the market. However, in these cases, firms had not clearly disclosed the risks of relative underperformance for long time periods to investors. It is important for firms to consider what investors can reasonably expect given the way the fund has been marketed. 

Our views 

In the reports that we looked at, firms assessed performance against a variety of measures, including fund objectives, absolute and relative performance, performance across a range of investment horizons, different risk measures, ESG factors and measures of how active the fund manager has been relative to the benchmark. All of these are interesting measures, but we think it is helpful for firms to set out up front what they consider to be their primary measure of performance so that investors understand the key takeaways. This would typically be net returns against the fund’s objectives over the recommended holding period, assuming that fund objectives are specific and well written. Some firms have combined different measures to create an “overall performance score” across all their funds – in these cases firms need to ensure that the measures used are appropriate to each fund’s objectives. In our view, it is also useful to provide a brief commentary on how the main risks relevant to the investment strategy have affected performance. 

Where funds have underperformed, they have not always been deemed to be “poor value”. Some firms have created a middle ground between “good value” and “poor value” such as “additional monitoring required”. We expect the FCA to challenge firms on what actions they are taking on these funds as well as those deemed “poor value”. A key question firms need to consider is how long a fund can underperform for or by how much it can underperform before it is deemed “poor value”. Where a fund is deemed poor value and the firm applies remedies, they should explain in subsequent assessments the extent to which these have been effective. 

Economies of scale 

The FCA’s rules require that the AFM must, separately, for each class of units in a scheme, consider…whether the AFM is able to achieve savings and benefits from economies of scale, relating to direct and indirect costs of managing the scheme property and taking into account the value of the scheme property, and whether it has grown or contracted in size as a result of the sale and redemption of units”. 

The FCA’s findings 

The FCA was disappointed with the way that many firms approached this indicator. Some firms have made little progress in developing methodologies for measuring economies of scale. Where firms have made progress, they were often unable to demonstrate how this work fed into Board discussions.  

Some firms assumed that that if a fund charged no more than the market rate, it must have shared economies of scale appropriately. The FCA found this unconvincing given that its asset management market study found that typical industry profit margins were not consistent with competitive outcomes. 

In its review of host AFMs, the FCA found that while some host AFMs had worked quite hard to negotiate break points in fees paid to depositaries and fund accountants, most had not considered negotiating break points in the management fees, even when funds had grown significantly in size.  

One firm’s modelling of costs relied too heavily on allocating costs based on fund size rather than the actual costs of operating each fund. This approach meant that the model showed larger funds did not benefit from scale economies beyond a certain size. 

Our views 

Some firms assessed economies of scale at firm level rather than at fund or share class level. In our view, an assessment of economies of scale only at firm level is not sufficient, although where firms are re-investing savings into business, this may produce benefits at firm level. 

Some firms explained that they have passed on economies of scale through break points, fee reductions in previous years, or existing fund charges reflecting economies of scale being shared. The FCA encourages firms to consider introducing break points. According to the IA study, 16% of firms provided a view on tiers or breakpoints, of which half had used tiering and half were opposed to it. Some firms are concerned that if they introduce tiering and the value of the fund’s assets falls, this may result in an increase in fund charges which could be difficult to explain to investors. Firms might consider applying lower charges only if the assets stay at the higher value for a certain period of time.  

Other firms explained that they have used economies of scale to reinvest in high quality services that would benefit consumers such as trading platforms, compliance, investment teams, and risk management capabilities. Where firms use the savings from economies of scale to reinvest in the business, we think they need to demonstrate that these investments provide tangible benefits for clients, rather than funding day-to-day operations with no benefit being passed on to clients.  

Some assessments mention that the firm caps fund costs at a competitive level for smaller funds, with the firm covering the remaining expenses. In some cases, these funds may be loss-making, which suggests that a cross-subsidy is taking place. Firms should understand the size of any cross-subsidies and satisfy themselves that investors in profitable funds are not being unfairly disadvantaged. 

Quality of service  

The FCA’s rules require that the AFM must, separately for each class of units, consider…the range and quality of services provided to unitholders”.  

The FCA’s findings 

Firms went to varying lengths to create metrics to judge their service quality. As with several other value indicators, the FCA raised concerns that service quality was mainly considered at firm level, even when variations in service levels between funds and share classes were likely.  

The FCA pointed out that while many firms considered the overall quality of the investment process, some judged the investment process through the lens of performance only. It has encouraged AFM Boards to consider the quality of the investment process, as this might provide a more informed insight into likely future performance. 

The FCA also raised a concern about some firms emphasising intangible matters such as “trust in the brand” rather than quantifiable measures. Where this was based on surveys, respondents were not asked why they trusted the brand. Furthermore, the FCA was not convinced by firms justifying good quality due to low investor complaint volumes and a low number of COLL breaches; in the FCA’s view complaints and breaches are metrics reflecting poor service and should be used as deductions from positive service quality measures.  

Interestingly, one firm had referenced an ESG service that had been integrated across a wide range of funds, but the firm could not explain why this justified additional fees compared to its non-ESG range. 

Our views

Quality of service is one of the most challenging indicators due to its subjective nature. Firms have taken varied approaches including reporting on surveys, consumer scores from third parties, qualitative and quantitative fund ratings from agencies, and ratings from platforms and consultants. Internal assessments were also carried out by some fund managers, on areas including data security, risk management, fund administration, placing and checking of trades, complaints handling, level of professional qualifications for staff, ESG considerations, diversity in culture and service quality during COVID-19. Some fund managers have quoted survey results relevant to individual funds, whilst others have referred to firm-level service quality indicators. Overall, there was little consistency across firms in terms of services assessed and metrics used, which made it difficult to compare reports across firms.  

The IA study found that only eight funds out of a sample of nearly 1,500 reported issues with quality of service. In our view, where firms report good service quality, they need to provide tangible evidence of this. We think that external views such as third-party assessments and consumer surveys can be powerful, as long as consumer surveys capture the customer’s actual experience of service quality and not only brand reputation, and are not drafted in a way that creates a positive bias towards the firm. Quantitative information from internal assessments can also be informative. We would also suggest that using the same metrics to measure service quality over time may help to demonstrate consistent service quality. 

In a few cases, we saw that “overall quality of service” was used to justify poor performance or poor value in other indicators. In these cases, firms need to consider what evidence they have that investors place a high value on service quality compared to other indicators. Where firms report a very high quality of service, this may raise investors’ expectations that firms will address deficiencies in other areas promptly.  


Whilst the value assessment exercise has focused minds and brought the concept of value to the industry’s and other stakeholders’ attention, the industry needs to do more to meet the FCA’s expectations. Many assessments have shortcomings in the areas of performance, economies of scale and quality of service, and we discuss shortcomings across the other value indicators in the slide pack accompanying our other blog on value assessments. We expect the FCA to continue to pursue its customer value agenda until it is satisfied that tangible remedies are being applied more broadly