The UK financial markets regulator has finalised rules strengthening the duty of asset managers to act in the best interests of investors in their funds.
The rules are the first that the Financial Conduct Authority (FCA) has adopted following its landmark asset management market study. The study, published last year, found weak price competition among asset managers and led it to refer the investment consultant sector for a competition investigation.
The regulator dropped the term ‘value for money’ from the rules requiring fund managers to justify to investors the charges they take from funds, following a consultation.
However, requirements published today stated that fund charges should be assessed annually in the context of the overall value delivered.
Christopher Woolard, executive director of strategy and competition at the FCA, said: “Today’s announcements are an important part of a package of measures that, combined, aim to achieve a fair, transparent, open and accountable market.”
The new rules also require fund managers to introduce independent directors to fund boards and to repay so-called box profits to the fund for the benefit of investors. Another measure brings individual focus and accountability to certain fund managers.
The FCA said the measures would deliver better protection for all investors, both those who were actively engaged with their investments and those who were not.
The regulator also said it wanted managers to improve communication regarding their funds so that investors could more easily understand what their choices were and what they ultimately invested in.
“We welcome the FCA recognising that people judge their asset manager by investment performance and service, as well as cost.”
Chris Cummings, Investment Association chief executive
Alongside the policy statement, the FCA has launched a further consultation on improving communications, aiming to address:
- fund objectives – according to the FCA these should be expressed more clearly and be more useful to investors;
- benchmark constraints – where funds are benchmark-constrained or limited in how far their holdings can differ from an index, this should be clear;
- appropriate use of benchmarks – if a fund has a benchmark, its use must be explained and consistently disclosed.
The FCA today also published a paper on the findings of an experiment it carried out on the impact of how information was presented. It said the work “reinforced the importance of disclosing costs and charges in a clear and meaningful way” and that investment managers should consider the results when thinking about their disclosure under new regulations.
At the Investment Association, the fund management trade body, chief executive Chris Cummings praised the regulator for “recognising that people judge their asset manager by investment performance and service, as well as cost”.
Richard Dowell, co-head of clients at Cardano, said the report was “a step in the right direction” for ensuring investment managers acted in the best interests of investors, “and crucially, show how they actually do this”.
In Dowell’s view, however, the FCA should have kept the term ‘value for money’ because managers might differ from each other in how they present the value they have delivered. This could “cause headaches every year” at the time of the annual assessment, he said.
Caroline Escott, policy lead for investment and defined benefit at the Pensions and Lifetime Savings Association, said: “Cost transparency is vital but it is important to avoid a ‘race to the bottom’ on costs and we must instead encourage investors to focus on the broader value for money they receive.”
Andrew Glessing, head of regulation at Alpha FMC, a consultancy, added: “Far from kicking its proposed package of remedies into the long grass, as many commentators suggested last year, the FCA has remained committed to the direction of travel it set out through consultation.”
The FCA’s policy statement on changes to fund governance is available here.
Its consultation paper on improving communication and information disclosure is here.
The results of and report on the regulator’s work on information presentation is here.