The asset management industry is once again under fire from the regulator – this time as a result of its review into how Assessment of Value (AoV) reports are being tackled. If this were a school report, it is not one you would want to be taking home to your parents.
In January 2019, the industry was given a shot across the bows when the ‘Dear CEO’ letter from the Financial Conduct Authority (FCA) highlighted some initial observations on how asset managers were approaching the production of the value assessments – and indicated they had not filled the regulator with confidence.
Although there were plans to conduct a review in the summer of 2020, the industry received a reprieve of sorts when the pandemic hit in March of that year. As a result of the challenges that followed, all available resources at the FCA were dedicated to supporting the day-to-day functioning of the regulator.
See also: How can asset managers address their assessment of value issues?
Roll forward a year and the regulator’s review has been completed – finding that, while the industry could be interpreted as meeting the letter of the regulation, it is not embracing the spirit underlining these new obligations. It should not be forgotten, of course, the requirement to produce AoV reports was one of the remedies proposed following the FCA’s asset management market study, which raised serious questions about how the industry was exercising its fiduciary duty to its investors.
Regulatory concerns
The recent update from the FCA bluntly opens its summary with the statement: “Most of the Authorised Fund Managers we reviewed had not implemented Assessment of Value arrangements we expect to be necessary to comply with our rules.”
Although this reflects the findings drawn from a sample of the reports produced and therefore may not be a truly accurate representation of the market as a whole, my colleagues and I at Square Mile do recognise a number of the issues highlighted from the discussions we have had with several asset management firms.
While, from a positive perspective, the report acknowledged the fact several participants had reduced the costs of some of their available share classes, this was mainly for their legacy direct book of investors. Beyond this, the production to date of AoV reports still poses a number of concerns, including:
* The use of assumptions that could be justified to the FCA
* Many of those reviewed did not apply some of the minimum considerations required of them
* When assessing their funds, many firms did not consider what they should deliver, given the investment policy, investment strategy and fees
* There was the suggestion that greater scrutiny should be applied to costs, such as fund management fees
* The degree of ‘robust’ challenge from independent directors
These were the ‘highlights’ and, given the objective of the AoV reports was to help asset managers justify their service and its value to investors, such an appraisal is less than glowing.
Missing the point
When we discuss the production of these reports with fund groups, all too often we find they sit within the remit of the compliance team, on the grounds they are broadly seen as a regulatory requirement – but this misses the point entirely. Instead, it would be far more beneficial to see them as a marketing document to promote an asset manager’s service, and to highlight the fact it is being offered at an appropriate level for a fair price.
Is it fair to say too many groups saw the production of AoV reports as a chore? There are notable exceptions, of course, and some groups produced transparent documents that are easy for the lay investor to understand.
More often than not, however, the approach taken has been to produce a complex compendium covering a large number of funds with different year-ends, using complicated terminology with the resulting document resembling a telephone directory (if anyone remembers what they look like).
It is understandable that fund groups wanted to introduce efficiency to manage internal workloads yet, from an investor’s perspective, how attractive or useful is a 300-page document when all they are interested in is how the fund they own matches up to their expectations on the delivery of objectives within acceptable cost parameters?
Evidencing value
The need for consumers to see fund groups as a good home for their savings is imperative if we are to win their investible monies for today and tomorrow. The regulator has suggested that each asset management board considers this latest review and how they should apply it to the way they conduct their Assessments of Value. This sits alongside the statement that the FCA expects to find firms fully complying with their rules – letter and spirit – by the next review.
The task of pushing asset managers to improve the quality of these reports also lies with other market participants, such as advisers, independent research businesses and journalists, to highlight poor practice in this space. We should be looking to improve the standard of these reports, so they can fulfil their purposes of evidencing the value of an investment service being offered.
Let’s hope the next report from the regulator is one we are comfortable taking home to show the parents.
Steve Kenny is chief distribution officer at Square Mile Investment Consulting and Research
