Compliance
Compliance Corner: FCA, UK Fund Management Industry

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The UK’s main financial watchdog has scolded the investment
sector’s commitment to delivering value for money, saying that a
recent survey of firms found shortcomings.
At a time when debate continues about the value-add propositions
of asset managers, the Financial
Conduct Authority recently examined processes used by
authorised fund managers when they carry out assessments of value
(AoVs).
“Most of the AFMs we reviewed had not implemented AoV
arrangements we expect to be necessary to comply with our rules.
Many had not implemented assessments meeting the minimum
consideration requirements and several practices fell short of
our expectations,” the FCA said yesterday. “AFMs often made
assumptions that they could not justify to us. For example, some
assumed that existing fund charges already reflected shared
economies of scale. This undermined the credibility of their
assessments.”
“Many firms did not properly apply some of the minimum
considerations, including performance and AFM costs and classes
of units, which meant that assessments were not properly
completed,” the FCA said.
That rules that took effect in September 2019 require AFMs to
publicly report on their value assessments and appoint
independent directors on AFM boards. In 2017, the regulator wrote
a major report on the state of the fund management industry,
finding evidence of “weak demand-side pressure on fund prices”
that created “uncompetitive outcomes” for investors in
funds.
“When considering a fund’s performance, many firms did not
consider what the fund should deliver given its investment
policy, investment strategy and fees. These firms often assessed
the value provided by a fund’s performance by comparing it with
the fund’s stated objective, irrespective of whether this
objective reflected how the fund was managed, and what the fund’s
fees suggested the manager should be trying to achieve,” the FCA
said.
It concluded: “We intend to review firms again within the next 12
to 18 months and we will assess how well firms have reacted to
our feedback. We will consider other regulatory tools should we
find firms are not meeting the standards we expect to be
necessary to comply with our rules.”
“The fairly aggressive feedback from the FCA is pretty damning
and a huge blow for the industry. The regulator’s concerns seem
largely to focus on fees and charges, although they do call out
performance reporting from active managers where meeting a
generic fund objective of ‘capital growth’ in rising markets is
not a sufficient achievement to cite value delivery,” Holly
Mackay, chief executive of Boring Money, said. (Boring Money is
an independent research and publishing house.)
“Value managers will also sit up and take note that the FCA took
a seemingly dim view of citing investment style as a long-term
‘get out of jail free’ card for relative underperformance,”
Mackay said. “Evaluation of costs and charges will also need to
be re-considered across the board. The regulator seems to be
frowning on a peer group comparison alone, requiring firms to
consider this based on their actual levels of spend and hence
margin, rather than relative cost. Those who work off an assumed
acceptable profit margin percentage have also been spanked –
without robust justification of where these ‘acceptable’ profit
margin levels came from, a firm-wide assumption is not OK.”