The Financial Conduct Authority (FCA) has released its latest proposals to improve transparency in the asset management industry, with demands for fund managers to demonstrate value being a key element. 
The latest consultation paper is part of an ongoing Asset Management Market Study into the competitiveness of the UK funds industry and how effectively it protects the end investor.
Among the final rules and guidance issued by the regulator is a requirement for fund management groups to make an annual assessment of value as part of their duty to act in the best interests of their investors. Firms have 18 months to implement this rule.
The proposals also include changes to the fund objectives, which will see the removal of jargon and the disclosure of benchmark constraints. This is intended to provide more clarity to the investor as to what a fund aims to achieve and how it will go about it.
Fund managers will have to consistently reference and explain the use of benchmarks across different fund documentation. Benchmarks will also have to be compared against past performance of funds, where past performance is available.
Through behavioural research, the FCA believes the use of a flattering benchmark can have a powerful effect on investors and how they are used is therefore important to avoid confusion amongst investors.
In line with the increased transparency brought to investors by the MiFID II and PRIIPs regulations, which saw increased disclosure of costs and charges by fund managers, a proposal to remove performance fees on gross performance has been put forward. The FCA report that this is ‘a fee on a fee’ and is unlikely to be understood by the investor.
Christopher Woolard, executive director of strategy and competition at the FCA, 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.
“Today’s announcements are an important part of a package of measures that, combined, aim to achieve a fair, transparent, open and accountable market.”
PwC director Andrew Strange said the FCA has “struck a pragmatic balance” between prescriptive rules and flexible guidance, adding that both investors and the funds industry should welcome the new rules.
“Delivering value for money for investors has always been a key tenet of the asset management industry. Changes to focus on wider value, rather than just charges, will better enable firms to demonstrate this value to their customers, although the new public statements could risk overloading consumers with information,” he said.
“However, updating guidance to make it easier for firms to switch investors to cheaper versions of the same fund is an example of the regulator helping firms deliver value.”
David Barron, chief executive of Miton Group, agreed that the regulator’s revised focus on the meaningful value that fund groups deliver to their investor, rather than simply looking for lower fees, is a positive move.
“Low costs don’t necessarily equate to value, which is a much broader issue,” he said. “The remedies proposed are sensible and the recognition that the previously suggested value for money approach should become a broader assessment of value is welcome.”
However, KPMG UK head of wealth & asset management regulation Jacqui Hughes is sceptical of the effectiveness of the new proposals.
“An opportunity has been missed to make a significant improvement to investors’ value for money immediately,” she said.
“Managers will not be required to switch investors into the best value share classes. The rationale given is to protect customer choice, but investors may not be aware how much they are paying. Managers are reliant on getting investors’ consent, unless the fund prospectus allows otherwise. In practice, the new guidance may mean little change.”
Fund managers have until 5 July 2018 to respond to the consultation paper, titled Consultation on further remedies – Asset Management Market Study.