FCA unveils market study rules, but industry scrutiny continues

The Financial Conduct Authority (FCA) has today published final rules and guidance from its asset management market study, but its scrutiny of the industry continues with an additional consultation focused on fund objectives and benchmarks.

FCA unveils market study rules, but industry scrutiny continues

The watchdog’s rules and guidance covers an annual “value” assessment, independent fund board directors, increased accountability and technical changes to fees and box profits.

More specifically, this includes:

  • a requirement for fund managers to make an annual assessment of value, as part of their duty to act in the best interests of the investors in their funds
  • a requirement for fund managers to appoint a minimum of two independent directors to their boards
  • the introduction of a new prescribed responsibility under the Senior Managers and Certification Regime (SMCR) to bring individual focus and accountability
  • technical changes to (i) improve fairness  around the way in which fund managers profit from investors buying and selling their funds and (ii) facilitate the movement of investors into cheaper share classes

Christopher Woolard, executive director of strategy and competition at the FCA said: “Today’s announcements are an important part of a package of measures that, combined, aim to achieve a fair, transparent, open and accountable market.”

The regulator stated firms have 18 months to implement the rules on assessment of value and appointment of independent directors. They will have 12 months for the rules related to the way in which fund managers profit from investors buying and selling their funds.

Fund information benchmark

Meanwhile, the regulator has launched a consultation on further remedies for the asset management industry, following the market study, which is focused on fund objectives and how information about their chosen benchmarks is disclosed.

It follows revelations in March that the FCA had ordered asset managers to pay investors £34m in compensation after overcharging for “closet tracker” funds.

The consultation zeroes in on making it clear when funds are benchmark-constrained, or limited in how far their holdings can differ from the weightings of a benchmark index. It also sought to ensure where a fund uses one or more benchmarks, this is disclosed consistently and explained to investors.

Woolard said: “The investment choices open to people, and the decisions they make on how to invest, can have a profound impact on their financial health. They can also have consequences for their families, as well as society as a whole.

“That’s why it is important the asset management industry, which looks after the savings of millions of investors, is working as well as possible. But our market study found evidence of weak price competition in a number of areas.”

Performance fees

In a consultation published today, the regulator announced rules to tackle concerns around weak price competition and the fairness of authorised fund managers’ (AFMs) fee structure, following its asset management market study in June 2017.

Under the current guidelines, AFMs are not permitted to charge performance fees based on gross fees, however this is not prohibited by a rule.

Therefore, the City watchdog is introducing rules to prevent this with a six-month implementation period.

The document outlined that managers will be required to provide an annual assessment proving value for money as part of fund managers’ duty to act in the best interests of investors.

AFMs will also be required to appoint a minimum of two independent directors to their board.

However, the regulator noted that it does not want to stymie innovative fee models introduced by the likes of Fidelity in its package of remedies.

It said: “There is substantial innovation in fund performance fees in the UK market at the moment, especially the development of more symmetrical performance fee models. These are fees that try to better align AFM and fund investors’ interests to the risks and reward of fund performance.

“We do not wish to inhibit such innovation where it is in the interests of investors. As a result we are not proposing significant rule changes at this time. We remain focused on whether fees are fair to investors and will intervene under our existing rules where we are concerned that this is not the case.”

The FCA added that the measures taken are to ensure that “all fee structures are fair” and is designed to deliver better protection for all investors.

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