The new guidance is meant to complement the existing study, which identified weak price competition in the industry when it was released in June 2017.
Thirty-nine groups from across the asset management industry participated in the consultation, including Amundi, BNY Mellon, Invesco Perpetual, Royal London Asset Management and the UK’s largest wealth manager St James’s Place.
Under the latest guidance, fund groups will now have to disclose why they use benchmarks and reference them consistently across the fund’s key information document (Kiid) and other consumer-facing communications.
“We have found that fund managers rarely explain why or how they are using particular benchmarks,” the FCA said. “Some of the ways fund managers use benchmarks include as a constraint on how they construct a fund’s portfolio, as a target for fund’s performance, or as a way for investors to compare the fund’s performance.”
Where a fund does not use a benchmark, the regulator said that managers must set out how investors should assess performance in the prospectus and other relevant documents.
Change is long overdue
Nutmeg chief investment officer Shaun Port applauded the regulator’s latest proposals, noting “a change in behaviour is long overdue and the FCA should be prepared to take action where firms are dragging their feet”.
Some have claimed that the new rules around benchmarks could saddle fund groups with higher costs if their product does not already use a benchmark. However the FCA has refuted this, stating the new rules do not insist on mandatory benchmarks.
Port said firms should be transparent about how they calculate fees and investment performance.
“Our customers want to know what they’ll pay for their investments in pounds and pence, so we tell them not only the annual cost but the projected cost over the course of their investment timeframe,” he said. “They want to know how portfolio performance compares with other risk-levels and against a competitor benchmark, so it’s available on our website. There’s no reason other firms cannot do the same.”
Moving forward managers will also have to clearly specify a fund’s objectives which the FCA criticised for being “not always as clear as they could be”.
Specifically, the regulator called on fund groups to use “consumer-friendly” language when setting out what the fund aims to achieve and the way it intends to do so.
However, it said it does not have any plans to publish examples of ‘good’ and ‘bad’ practice or publish a glossary of consumer-friendly terms.
“Fund managers will need to consider whether consumers can reasonably understand the objectives they set out.”
The new rules and guidance will:
-set out how fund managers should describe fund objectives and investment policies to make them more useful to investors
-require fund managers to explain why or how their funds use particular benchmarks or, if they do not use a benchmark, how investors should assess the performance of a fund
-require fund managers who use benchmarks to reference them consistently across the fund’s documents
-require fund managers who present a fund’s past performance to do so against each benchmark used as a constraint on portfolio construction or as a performance target, and
-clarify that where a performance fee is specified in the prospectus, it must be calculated based on the scheme’s performance after the deduction of all other fees