The FCA is implementing some of the remedies identified in its Asset Management Market Study (AMMS), and consulting on additional measures. Key changes for Authorised Fund Managers (AFMs) are summarised below, including on: Value for Money assessments; independent director requirements; a Prescribed Responsibility in SMCR; guidance on share class "conversions"; and repayment of box profits back to the fund.
At the same time, there is a further consultation on additional remedies, including: guidance on the description of fund objectives and investment policies; appropriate explanation and consistent representation of benchmarks; and calculation of performance fees, to be net of other fees.
The FCA has also published an Occasional Paper on presentation of warnings to nudge investor behaviour to consider fund charges.
Policy Statement PS18/8
Handbook and rule changes to address AMMS findings were published in FCA policy statement PS18/8 on 5 April 2018. There are some changes to the initial proposals, and deferrals to implementation dates:
- Value for Money": fund charges will need to be assessed in terms of "overall value", to ensure Authorised Fund Managers (AFMs) act in the best interest of investors. Factors relevant to the assessment of value include: performance after deduction of charges; cost of service provision for relevant charges; economies of scale achieved by the AFM; market rate for any comparable services; for each charge, the charges of the AFM and its associates for comparable services to similar clients; and whether charges are higher than for similar unit classes in the scheme. The value rules are to be effective 30 September 2019, later than proposed in CP17/18.
- Independent directors: to constitute 25% of the AFM board and at least two in number. Again this rule change is delayed to 30 September 2019.
- SMCR PR for AFMs: a new Prescribed Responsibility (PR) specifically for AFMs will be introduced as part of the extension of the Senior Managers and Certification Regime (SMCR). This PR would make clear that a Senior Manager, usually the AFM board chair, should take reasonable steps to ensure the firm undertakes the value assessment, recruits independent directors, and acts in the best interests of fund investors. The FCA will publish further rules later in 2018, expected to be effective mid to late 2019.
- Share classes: final non-Handbook Guidance (recasting FG14/4) removes the need for an AFM to obtain consent from each investor before "converting" holdings to cheaper but otherwise identical classes of the same fund. FG18/3 will be effective from 5 April 2018. The FCA is still considering a ban on trail commissions.
- Box profits: "risk-free" profits should be repaid to the fund to ensure fair treatment, where AFMs deal as principal in the units of their funds, matching units of incoming and outgoing investors. Rule changes are deferred to 1 April 2019.
Consultation Paper CP18/9
The FCA is simultaneously consulting on additional measures under the AMMS. The consultation seeks to remedy concerns that insufficient information is provided to investors about fund objectives, operation and performance. The FCA considers that the provision of such information will exert greater competitive pressures on AFMs. CP18/9 includes:
- Draft non-Handbook Guidance: the FCA proposes new guidance on "The description of fund objectives and investment policies".
- Benchmark rules: draft Handbook rules encouraging appropriate explanation as to why benchmarks are used, and consistent representation of fund benchmarks and fund comparators. These proposals address a wider issue than the recent statutory instrument that restricts the usage of some specified indices under the EU Benchmarks Regulation.
- Performance fees rules: draft rules for the calculation of performance fees, to be net of other fees in all cases.
Alongside the FCA's proposals, the Investment Association has proposed working with consumer representatives to promote the use of consistent terminology, e.g. "long term" and "capital growth".
In the first half of 2019, the FCA will confirm whether it intends to consult on the extension of CP18/9 remedies and PS18/8 box profits rules, to unit-lined and with-profits business.
Warnings: Occasional Paper OP32
Together with the Asset Management Market Study policy statement and consultation paper, the FCA also published on 5 April 2018 an Occasional Paper, "Now you see it: drawing attention to charges in the asset management industry", OP32. The Paper reports on a behavioural experiment where investors were asked to select one of six UK equity funds on a simulated platform.
The experiment found some evidence that an effective way to increase participants' selection of a fund with cheaper charges is to include a Warning & Review Screen: this screen appears once investors have selected a fund, summarising costs and charges, and comparing charges to others in the same asset class – asking investors to confirm their choice or review the fund selection. On their own without a Review Screen, comparator charts, impact charts and other warnings on charges had a lesser effect on investor choice.
The FCA also notes (perhaps unsurprisingly) that presenting information at the top of a page can be more effective.