On 7 April 2016, the FCA published the findings resulting from its Thematic Review TR16/3: “Meeting investors’ expectations.”  

The Review highlights the FCA’s view that, in the fund management sector, firms should act as agents that compete to provide returns and services that are consistent with an investor’s objectives. In undertaking the Review, the FCA considered how firms ensure they meet investors’ expectations through the appropriate:

  • disclosure of investment strategies and mandates;
  • use and content of marketing material; and
  • distribution of funds.

The key message running through the various strands is one of continual and effective governance and oversight.

The funds reviewed by the FCA were all UCITS funds, covering a wide range of asset classes and strategies. Generally, the FCA found that most fund management firms are taking the right steps regarding investor expectations. However, the FCA did identify some examples of unclear product descriptions and inadequate governance or oversight. The Review usefully sets out useful examples of what the FCA considers to be good practice and what it considers to be bad practice.

Clear and correct product descriptions

The FCA stressed the need for clear product descriptions to enable investors to understand which strategies funds follow, how fund managers will invest on their behalf, and what risks are involved when investing. The FCA will expect firms to provide customers with enough detail about a fund in a clear and concise manner that they can understand.

Action points for managers:

You must be clear about the strategies your funds follow. For example: 

  • include an explanation of the steps a fund manager would take in selecting assets;
  • signpost in fund documents where a product is particularly complex with recommendations that potential investors seek advice;
  • be specific about the assets which will be used – vague or wide ranging investment policies are not good practice;
  • ensure that descriptions of funds are consistent across all literature;
  • use customer testing to assess whether strategies and disclosures are understood by your investors; and
  • use retail-friendly language when describing your investment and asset allocation polices or strategies.

You must disclose if a fund has an index-based strategy:

  • if a fund manager is constrained by a strategy linked to an index (eg an outperformance or tracking error target) this should be disclosed;
  • indices should be disclosed as benchmarks in the past performance section of KIIDs;
  • if a fund has material passive holdings, this fact should be disclosed. (As an example of poor practice, the FCA noted that two funds with 20% investment in passive strategies did not mention this in their fund documents); and
  • relevant information should be disclosed whether the benchmarks are public or private.

You must clearly describe the risks of investment. Examples of good practice are:

  • setting out tables of risks in your prospectus to allow for ease of comparison across funds; and
  • consistently communicating risks by including material risks in your factsheets as well as your KIIDs.

You should consider the overarching themes running through these points. These are:

  • Are you using language across your fund documents which a retail investor can understand?
  • Are your disclosures across your fund documents sufficiently detailed and, importantly, consistent?

Effective governance and oversight of your products

The FCA highlighted the need for fund management firms to act in the interests of investors when operating or managing funds. These obligations should be maintained even where a fund is no longer being marketed to new investors. The FCA notes that it reviewed four funds which are no longer actively marketed and identified oversight and governance issues with each of them.

Action point for managers:

You must effectively monitor your funds’ portfolios. This includes:

  • conducting regular reviews of your funds to assess the investment approach and to ensure that the investment strategy is being followed and remains appropriate;
  • reviewing the investment return produced; and
  • regularly reviewing all aspects of the funds which are included in marketing and pre-marketing documents.

You must continue to effectively manage funds which are no longer actively marketed:

  • such funds should be treated in the same way as your actively marketed funds and included in any fund reviews; and
  • good practice requires that the points considered above in “clear and correct product descriptions” should also be applied to the funds which have soft closed.

Ensuring appropriate distribution of your products

The FCA noted that investors rarely buy funds directly from fund management firms, but invest through financial advisers or platforms. They stressed that, if a fund management firm has decided that a fund should only be available with advice, it is important that the firm controls its distribution channels.

Action point for managers:

You must effectively and carefully monitor your distribution channels. This may include:

  • taking active steps to monitor sales patterns and identify trends which would indicate inappropriate sales;
  • having systems in place to allow the segregation of advised-only and execution-only funds; and
  • actively seeking to receive and process relevant sales and customer information.

You must provide appropriate documentation and information. For example:

  • providing distributors with information which is targeted to the correct sales channel and investor type;
  • distinguishing between those documents suitable for investment professionals and those which are for retail investors; and
  • the points raised above regarding document disclosures and consistency of information should also be considered for your distributors.

Next Steps

The FCA set out a list of next steps indicating also that it will be writing to all the firms in its thematic sample to provide individual feedback. It will follow up on this work through its routine supervision.

Action points for managers and particularly senior management:

  • Consider whether any of the concerns raised in the Review are reflected within your own firm’s operations; and
  • Take any action necessary to minimise the risk of poor outcomes to customers.

How can we help you?

Review of your fund investment objectives and policies:

  • taking a fresh look at the current language used in your fund objectives and policies and pointing out where this should be changed;
  • providing guidance on what the FCA are looking for with respect to suitable investment objectives and policy language; and
  • advising you on any investor communications which may be required.

Review your risk disclosures across your suite of fund documents:

  • reviewing your KIIDs, factsheets and prospectuses and advising on the use of, and language included in, your risk disclosures; and
  • carrying out a gap analysis on these documents to highlight where you may have inconsistencies.

Review your investment strategy information:

  • examining your current strategy and asset allocation information and advising on their use in your documents, including whether they need to be further explained.

Review of your distribution arrangements:

  • reviewing the arrangements you have in place with your distributors to advise on any changes which would strengthen the information you provide to and receive from your distributors; and
  • assisting you with a review of the documentation provided to distributors to ensure it is appropriate  and targeted for the relevant sales channel.