When the FCA published its final report on the Asset Management Market Study (AMMS) last year, they concluded that price competition was weak in a number of areas. The study also found poor investor understanding of the objectives of funds; how fund performance is determined, and calculation of total costs and charges. The FCA proposed a package of remedies intended to address these issues, including:
- measures to strengthen the duty on asset managers to act in the best interests of investors (more robust governance arrangements and improved disclosure)
- measures to drive competitive pressure on asset managers (greater fee transparency)
- proposals to improve the effectiveness of intermediaries (such as Investment Consultants).
These proposals will come into effect over the coming year, adding another area of change for the the sector alongside, navigating the post-Brexit landscape and adjusting to the impact of MiFID II and MAR.
Opinion on the rule changes is mixed. The response from the asset management sector has largely been supportive and positive, while some consumer bodies have argued that the FCA has not gone far enough in tackling inefficiencies in the sector. It’s clear that the FCA has softened its approach both in tone and substance since first launching the market study back in November 2015.
Asset managers still digesting the rule changes around fees and charges should consider the FCA’s subsequent Occasional Paper, which tested the impact of disclosing information, including risk warnings and information about fees and charges, on the decision-making of retail investors using a simulated online investment platform.
The effectiveness of the rule changes will depend on how each firm opts to present the information to consumers. Firms should consider this an iterative process and be prepared to try different approaches to communicating charges to consumers, testing the impact of each on behaviour, in order to find the most effective method.
What is changing?
The new rules come into effect in April 2019, with others taking effect in September 2019. There is a consultation period for the CP open until 5 July 2018.
The agreed and proposed changes fall under three key areas:
- AFMs must appoint at least two independent directors to their Board, comprising at least 25% of the Board; and
- A new Prescribed Responsibility for AFMs will be introduced with Accountability II.
- AFMs no longer need to get individual consent from each investor before converting them to a lower cost (but otherwise identical) share class; instead AFMs can make a simple, nil-response-required notification to investors;
- The outstanding Consultation Paper includes a proposal to increase / standardise disclosures around fund objectives; and
- The outstanding Consultation Paper includes proposals to require AFMs to clarify why and how benchmarks are used. If no benchmarks are used, an AFM should explain how investors should assess a fund’s performance.
Fees and Charges
- AFMs must assess the fund charges in the context of the overall value delivered against a non-exhaustive list of prescribed elements. If the fund charges are found to be unjustified, AFMs should take corrective action and explain the assessment annually in a published report;
- Box profits should be repaid to the fund for the benefit of investors (that is the risk-free profit managers generate when dealing as principal in the unit of their funds); and
- The outstanding Consultation Paper proposes preventing AFMs from taking performance fees on a gross basis via rule change.
What else could change?
- The FCA is still considering whether to continue to allow the payment of trail commission;
- The regulator has made a Market Investigation Reference to the Competition and Markets Authority on investment consultancy and fiduciary management services;
- Last summer the FCA launched an additional market study into investment platforms;
- The FCA will undertake diagnostic work into with-profits and unit-linked products before determining whether to change investment trust governance arrangements; and
- Last year, the FCA established a working group of industry and investor representatives to consider more consistent and standardised disclosure of costs and charges to institutional investors.
The regulator has said that it will be closely monitoring the impact of the measures as they take effect. We expect additional guidance down the line, particularly on new or technical areas such as the requirement to publish value reports and treatment of box profits.
BDO has extensive experience in assisting firms to implement significant regulatory change programmes – from corporate governance (SMR) to consumer protection (RDR and FAMR). We work with a number of asset managers operating in the UK so our specialist team is deeply familiar with the regulatory framework and challenges facing the sector and firms of varying sizes. If your firm would like to discuss these changes further, please get in touch.