FCA pursues annual ‘value for money’ assessment from buy-side

FCA enforces annual assessment despite concerns around sensitive information and the time frame having been raised.

Asset managers in the UK will be forced to provide annual assessments with regards to costs and value for money of funds, despite claims the requirement is misguided.

Authorised fund managers (AFMs) will have to assess value for money against a ‘non-exhaustive’ list of elements prescribed by the Financial Conduct Authority (FCA), including whether charges are reasonable in relation to costs and the quality of service provided, according to the UK regulator.

Industry feedback on the annual reporting of value for money assessments outlined several concerns, including that the requirement was misguided, as some funds are medium to long-term investments.

Certain investment strategies could see funds under perform in the short-term, so the assessment should instead be based on the holding period of a fund rather than annually, the buy-side’s feedback asserted.

The FCA rejected the claim, stating: “It would not make sense to require statements to be published in line with the recommended holding period of a fund – which could be years – as people invest in funds on a rolling basis, and often for shorter periods than the recommended holding period.”

Other asset managers expressed concern that public reporting on the prescribed elements could force the disclosure of commercially sensitive information.  

“With these findings, and having taken account of the feedback, we consider that the core of our policy is correct – that agents should be accountable to their underlying clients on how they deliver value,” the FCA said.

The regulator reiterated it was aware that the buy-side highlighted the draft rules were seen to be too focused on costs and clarified fund charges should be assessed in the context of the overall service delivered.  

“An annual, public statement describing the assessment conducted by the AFM is an important part of our package and helps with transparency and scrutiny of these assessments across the industry,” the regulator added.

The rules have been set out in response to the FCA’s UK asset management industry competition review, published over the past couple of years, which argued buy-side firms were earning persistently high-levels of profits at the expense of investors.

Some asset managers do not disclose certain transaction charges to investors and they are often estimated in advance meaning investors bear the risk of actual charges being much higher than anticipated, the review found.

“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,” Christopher Woolard, executive director of strategy and competition at the FCA, commented. “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 Investment Association’s chief executive, Chris Cummings, welcomed the FCA’s steps to ensure funds are reviewed in terms of value for money for end investors.

“Our industry is committed to demonstrating, and delivering, good value to the millions of people who entrust their savings to us,” he said. “We welcome the FCA recognising that people judge their asset manager by investment performance and service, as well as cost.

“The Investment Association is already working with the FCA in these important areas and looks forward to continuing this in the coming months.”

Implementation of the new requirement has been extended given the weight of the feedback received to 30 September 2019. Firms can choose how they communicate quantitative and qualitative information as part of the assessment as long as it is not misleading, the FCA concluded.