The UK financial regulator wants improvements to the value assessment regime for investment funds – including a greater challenge to fund boards by independent directors and better cost assessments by firms.
The Financial Conduct Authority (FCA) said fund managers have better practices in place since the 2019 introduction of the ‘Assessment of Value’ (AoV), and these had led to “millions of pounds” in savings for investors, but some practices “still need improvements”.
Fund managers must produce a value assessment at least annually under the AoV regime in which, for example, they communicate how the benefits gained from economies of scale as assets grow are subsequently passed on to investors.
Firms have “fully integrated considerations on assessment of value into their product development and fund governance processes”, the FCA – which has published a review of the regime – said.
This greater focus has also driven changes in fees and charges, resulting in savings of costs to consumers amounting to “millions of pounds”.
But the FCA said “there remain outliers where action needs to be taken”, and this was important given the introduction of the Consumer Duty rules, in force since July 31 and which also focus on delivering value to customers.
Camille Blackburn, director of wholesale buy-side at the FCA, said: “It is vital that firms make sure they are not solely focused on a fund’s profitability over value for money for investors. The Consumer Duty, which is now in place, further supports our expectations in this area.”
Some findings of the AoV review are:
• More investors were moved to ‘clean’ shares classes with no commissions paid, or firms have reduced fund fees;
• Firms put too much emphasis on comparable market rates to justify their fees rather than using a fuller range of value measures;
• “Significant differences” between good and poor practice in how firms assess their funds’ performance.
The FCA, which reviewed 14 firms of different sizes and business models, also said some firms’ independent non-executive directors (iNEDs) did not provide “sufficient challenge” to boards, or did not probe deeply enough into data.
Catherine Battershill, managing director at the Fund Boards Council (FBC), said providing robust challenge is fundamental to the iNED role and that the FCA’s findings underlined that this “is not always easy to achieve”.
“Quite simply, it requires iNEDs to be both close enough to the detail to ask pertinent questions and to probe effectively, while at the same time sufficiently removed from the minutiae to maintain their independent perspective. From speaking to iNEDs at FBC member firms, we know that those that do this well have spent considerable time building their knowledge of the firm’s approach and its methodologies while setting very clear boundaries around their oversight role.”
Andy Agathangelou, founder of the Transparency Task Force (TTF), said the criticisms by the FCA of independent non-exec directors were “well made and an enduring issue”, and he added: “The FCA sets out a conundrum between remoteness and independence for iNEDs – an issue the TTF identified early on. Good practice should see iNEDs involved in the design of the AoV framework, but suitably independent of the analysis to be able to then authentically challenge the resulting outcomes.
“All too often the board is fed an end result without transparency of the inputs. We agree with the FCA that this balance needs to be struck.”
Arguing that economies of scale were one of the least understood or transparent areas of asset management, Agathangelou also said: “Overall, there remains better but far from perfect transparency with regards to the assessment of value, particularly with regards to using inclusive fee metrics that cannot be gamed by the industry.”
He said the TTF broadly welcomed the FCA’s ongoing scrutiny of the AoV, as there was a “real risk that once embedded the AoV would become business-as-usual and fee reform would then slow”.
Jonathan Lipkin, director, policy, strategy & innovation at the Investment Association, said delivering value to investors was at the “heart of the industry’s purpose” and welcomed the findings.
He added: “We note that there are still some areas for improvement and will continue to work with the regulator and our members to ensure investment funds deliver good outcomes for investors.”
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