Compliance

Compliance Corner: FCA, UK Fund Management Industry

Editorial Staff 7 July 2021

Compliance Corner: FCA, UK Fund Management Industry

The latest compliance news: regulatory developments, punishments, guidance, permissions and new product and service offerings.

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.”

Register for WealthBriefing today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes