Summary: The FCA is implementing a comprehensive remedies package on asset management following its Asset Management Market Study (AMMS), a journey which commenced in November 2015. This briefing sets out some key points of interest from the FCA’s recent AMMS publications, along with our comments on their impact on authorised fund managers (AFMs).
The FCA is implementing a comprehensive remedies package on asset management following its Asset Management Market Study (AMMS), a journey which commenced in November 2015. The aim is to achieve greater competition and innovation in the asset management industry and to better serve the interests of both institutional and retail consumers. Last week, the FCA issued a number of documents including a Policy Statement (PS18/8), a new Consultation Paper (CP18/9) on further remedies (principally on disclosure of costs and charges) and an Occasional Paper looking at the prominence of costs disclosures in fund documentation. These follow the findings and recommendations on the AMMS in the FCA’s June 2017 Final Report and Consultation Paper (CP17/18) (and which we commented on in an earlier briefing).
The package of measures will only apply to authorised fund managers (AFMs). AFMs include managers/operators of open-ended FCA-authorised funds (including ICVCs, Property Authorised Investment Funds (PAIFs)), Co-Ownership Authorised Contractual Schemes (CoACS) and authorised unit trusts) which take the form of UCITS, NURSs and QISs. AIFMs of unregulated vehicles and other portfolio managers are not within scope irrespective of who those structures are targeted at. However, these measures will still be a relevant consideration for anyone thinking of converting an existing structure to, or establishing a new, FCA-authorised fund vehicle in the future (a trend we are seeing and which we expect to accelerate in light of the Autumn 2017 Budget proposals to require overseas investors to pay capital gains tax on disposals of all UK property and property rich entities). There is also a possibility that the FCA may expect other AIFMs to apply similar standards in order to be acting in investors’ best interests.
Managers are, of course, already seeking to assimilate a huge amount of changes into their businesses – including in relation to MiFID II, PRIIPs and the anticipated extension of the Senior Managers and Certification Regime (SMCR) to investment managers. Obligations under MiFID II on greater costs disclosures and on product governance will already apply to AFMs – either directly where the FCA chose to apply equivalent provisions to AFMs as guidance or indirectly through obligations on other investment firms in the distribution chain. As such, these requirements will serve to add a further layer of complexity before it has been possible to assess whether those other changes had already addressed the FCA’s initial concerns when it commenced the AMMS project.
We have set out below some key points of interest from the FCA’s publications, along with some comments.
Assessment of Overall Value
AFMs will be obliged to assess the overall value delivered to investors. As part of this assessment, AFMs have to conclude whether fund charges are justified in this context, and if not, what action has been or will be taken to address this. Other considerations in this assessment of value include quality of service provided to investors, fund performance, whether the AFM has achieved any savings and benefits from economies of scale and comparable market rates for services provided. Performance can be assessed over a time period appropriate to the fund’s investment objective, policy and strategy and AFMs can explain why retail and institutional mandates are not comparable.
AFMs have to publish an annual statement within 4 months of the relevant accounting period describing their value for money assessment, the aim being to facilitate better transparency, comparison and scrutiny across the sector. AFMs are not expected to disclose information which is commercially sensitive or anticompetitive; although they still must comply with the FCA rules that communications are fair, clear and not misleading.
This requirement will take effect from 30 September 2019, a 6 month extension from the initial proposal. Under the originally proposed measures, AFMs were required to consider “value for money” which the FCA conceded looked as if it was focused solely on costs rather than the overall value provided.
The list of items an AFM must consider when assessing whether value has been provided is very nebulous. On the one hand, this means we may see quite varied reports from firms on their assessment; and on the other it may be difficult for AFMs to defend themselves against a challenge by the FCA to their assessment process and outcomes.
All AFMs will be required to appoint independent directors to make up at least 25% of their board (where there are fewer than eight directors there must be at least two independent directors). Whilst noting concerns raised in the feedback process that this proposal may create disproportionate barriers to entry for start-ups, the FCA wants all investors to benefit from this rule, and so the new requirements will apply to all AFMs regardless of their size.
The rules set out detailed provisions for whether a person is independent. A director is unlikely to be considered independent if there is a monetary link with the AFM’s group, or where they have a close relative in a senior position in the AFM or a firm in its group. There is no obligation for the AFM chair’s to be independent; it is the AFM’s decision. The FCA will be monitoring this proposal and will consider introducing higher thresholds for independence in due course, if necessary.
Independent directors can act on more than one board (including on AFM group companies) but will be restricted to terms of up to 5 years which can be renewed once up to a 10 year maximum service period.
We welcome that the substance of these requirements has not altered over the consultative period, and the ability for there to be common independent directors on AFM group boards.
The requirement to have independent directors will come into force in September 2019. Although that seems distant, AFMs will need to consider the lead in period for identifying candidates and making appointments.
The FCA has decided to implement the new Prescribed Responsibility for AFMs, as part of the proposed extended SMCR regime. This relates to a senior manager’s responsibilities for an AFM’s assessment of value, independent director representation and acting in investors’ best interests. The significance of making these duties into a prescribed responsibility is that senior managers will be personally accountable for compliance with them.
Whilst this development is no different from that anticipated under the SMCR extension, AFMs can now build this into their broader SMCR implementation plans.
Implementation of the extended SMCR regime is expected mid-late 2019.
The FCA has decided not to extend its governance proposals to pensions. However, the possibility of further changes to other investment products, for instance with-profits and unit-linked insurance products and investment trusts, remains open until an expected decision from the FCA in mid-2019.
Consultation on greater disclosure
The FCA is also proposing new rules which would prevent AFMs charging performance fees on a gross basis. The consultation paper also considers overhauling how asset managers disclose fund objectives to require AFMs to more clearly explain how they use (or don’t use) benchmarks in the context of assessing fund performance. These measures are the subject of a consultation and AFMs should consider how they will be impacted and engage in the consultation process.
Competition and Markets Authority (CMA) investigation
Finally, the investment consultancy market is still subject to a market investigation by the CMA, following a reference from the FCA in September 2017. The CMA is expected to publish provisional findings in Summer 2018, with recommendations to be finalised by March 2019. There is therefore a possibility that additional remedies are in the pipeline.