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FCA proposes 'all-in fee', value-for-money rules

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The Financial Conduct Authority (FCA) wants to place requirements on asset managers to demonstrate value for money to investors.

Oversight boards for investment funds currently “do not robustly consider value for money,” the FCA said in its interim report into its asset management market study.

It has proposed an overhaul of internal governance standards for such boards, as well as third-party authorised corporate director (ACD) firms, to ensure they consider value for money issues.

Boards should be comparing equivalent retail and institutional share class prices and considering how to pass on economies of scale to investors – using sliding-scale fee arrangements, for example – the FCA said.

“There are inherent conflicts of interest limiting the ability of boards and ACD boards to act independently and in the best interest of the fund’s investors,” the regulator stated.

New requirements could include “as a minimum”:

  • Consideration of all fees incurred by investors, including transaction costs and ‘box profits’
  • Performing annual reassessments of investment management agreements and renegotiating these where necessary
  • Consideration of potential alternative fee structures
  • Publication of an annual report detailing how boards are ensuring value for money, including assessments and negotiations

Amanda Rowland, asset management regulation partner at PwC, said: “This will considerably change the way the market operates and will be an enhancement to existing best practice.

“The industry will need to work hard to demonstrate how it already best serves investors and how they intend to meet the concerns expressed.”

The FCA has also proposed the introduction of an “all-in fee” for investment funds, taking in all costs, to improve transparency and competition among asset managers.

It has invited comments on four different models, including a proposal for asset managers to be forced to pay any costs incurred above the explicit fee charged to investors.

The FCA said: “We would welcome feedback on the extent to which competition will provide enough pressure to prevent a single charge resulting in an increase in charges paid by investors or other unintended consequences such as sub-optimal levels of trading or changes to market practices.”

Will Goodhart, chief executive at the CFA Society of the UK, said: “There are advantages and disadvantages to each of the four different approaches that are suggested. Rather than regulating a single approach, it might be best here to set a principle and to let consumers decide which approach they prefer. 

“If different managers and different clients prefer different approaches, it might be better to allow them to settle on these, rather than regulating them into a format that will certainly work well for some but not necessarily for all.”

The all-in fee proposal follows a failed attempt by the asset management sector to produce a similar all-in-one cost template.

Last year, Daniel Godfrey – then-chief executive of the Investment Association – was forced out of the asset management trade body as some members opposed efforts to develop a single cost figure for retail funds.

The FCA later hired Godfrey on a short-term consultancy contract to feed in to its asset management market study.

The proposals emerged from the FCA’s asset management market study, designed to assess the competitiveness of the country’s investment industry.

The interim report found that price competition between active managers was “weak”.

While the majority of the investment fund proposals were aimed at the retail sector, the FCA’s Chris Woolard, director of strategy and competition, likened small pension funds to retail investors in terms of sophistication and understanding of complex structures and products.

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  • QN-2546

    Asset class: Real Estate Equity Fund (non listed).
    Asset region: Europe.
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    Closing date: 2019-06-28.

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