Introduction

In November 2015, the FCA published the terms of reference for an asset management market study (AMMS). The intention behind the AMMS was to understand how asset managers compete to deliver value to both retail and institutional investors. The FCA published an interim report in November 2016 which was followed up by a final report in June 2017. In the final report the regulator proposed a package of remedies which were intended to make competition work better in the asset management market and protect those least able to actively engage with their asset manager.

The first set of final FCA rules and guidance implementing the AMMS remedies were published last April (Policy Statement 18/8: Asset Management Market Study remedies and changes to the Handbook – Feedback and final rules to CP17/18 (PS18/8)) and were reported on in the May 2018 issue of Global Asset Management Quarterly. Essentially the changes focussed on governance issues (value for money, independent directors and the senior managers’ regime), conversion (fund investors being converted to cheaper but otherwise identical classes of the same fund) and box profits.

At the same time the FCA issued a further consultation implementing more of the AMMS remedies (Consultation Paper 18/9: Consultation on further remedies – Asset Management Market Study). These remedies related to transparency, focussing on measures to improve the quality, comparability and robustness of information available to investors. Key FCA proposals included:

• new non-Handbook guidance to remind authorised fund managers (AFMs) how they should describe fund objectives and investment policies to make them more useful to investors;
• requiring AFMs to explain why their funds use particular benchmarks or, if they do not use a benchmark, how investors should assess the performance of a fund requiring AFMs that use benchmarks to reference them consistently across the fund’s documents;
• requiring AFMs that present a fund’s past performance to do so against each benchmark used as a constraint on portfolio construction or as a performance target; and
• amending rules to require that where a performance fee is specified in the prospectus, it must be calculated on the basis of the scheme’s performance after the deduction of all other fees.

The consultation closed last summer (5 July 2018).

New rules and guidance

On 4 February 2019, the FCA followed up on its consultation by publishing final rules and guidance in Policy Statement 19/4: AMMS – further remedies (PS19/4). As was the case with PS18/8, PS19/4 is relevant to UK AFMs who manage authorised funds (open-ended collective investment schemes). However, it will also be of interest to other firms in the asset management industry including those acting as delegated portfolio managers, depositories of authorised funds and financial advisers.

What is changing?

The new FCA rules and guidance set out in Appendices 1 and 2 of PS19/4 don’t appear to significantly deviate from those that were consulted on. The FCA reports that where amendments have been made, they were introduced to improve clarity and ensure that the policy intention was achieved.

Fund objectives and investment policies

As per the consultation, the FCA remains of the view that its existing rules on objectives (broadly, fund objectives and investment policies) and their disclosure is adequate and are not changing.

However, non-Handbook guidance has been published which sets out the FCA’s expectations of how firms might comply with the existing requirements in practice. In addition, the non-Handbook guidance sets out that non-financial objectives must be explained to consumers in a way that is fair, clear and not misleading. The FCA agrees that environmental, social and governance objectives can be financial as well as non-financial.

The FCA has rejected calls from some respondents to introduce in the non-Handbook guidance, examples of good and bad practice, nor has it published a glossary of consumer-friendly terms. The regulator states that fund managers “will need to consider whether consumers can reasonably understand the objectives they set”.

But the FCA has amended the final guidance around the disclosure of investment strategies in order to clarify its expectations. Fund managers are expected to disclose in key information documents (KIDs) the features of the investment strategy that are a fundamental feature of how the product is managed.

Benchmarks

The background to these rules is that the FCA found that fund managers seldom explain why or how they are using particular benchmarks. The new rules and guidance does not require or encourage fund managers to use benchmarks but will require them to explain why they have chosen a particular benchmark.

The FCA has confirmed that the three benchmark categories set out in the earlier consultation to capture the different ways fund managers use benchmarks in practice. These are a:

1. ‘constraint’ – an index or similar factor that fund managers use to limit or constrain how they construct a fund’s portfolio;
2. ‘target’ – an index or similar factor that is part of a target a fund manager has set for a fund’s performance to match or exceed, which includes anything used for performance fee calculation; and
3. ‘comparator’ – an index or similar factor against which a fund manager invites investors to compare a fund’s performance.

New rules have been introduced requiring fund managers to explain in a fund’s prospectus and consistently in other consumer-facing communications that include fund-specific information, why they have used any constraint, target or comparator benchmark. This does not, however, apply to general ‘brand only’ adverts or communications (image advertising). Non-Handbook guidance has also been introduced for dealing with the instance where a fund manager doesn’t explicitly manage a portfolio in line with a benchmark but other factors such as internal restrictions mean that the fund is effectively managed with reference to a benchmark.

For funds that use more than one benchmark, the FCA has amended the text that appears in Conduct of Business sourcebook (COBS) 4.5.14R so that it is clear that they should show past performance against the different benchmarks.

The new rules do not apply to the UCITS KID or the Key Investor Information Document (KIID) equivalent for a non-UCITS retail scheme (NURS). The new rules on chapter 4 of COBS do not impose obligations on firms to add further information to the UCITS KID (or the NURS equivalent). This is because legislation already sets out the form and content of the UCITS KID in an exhaustive manner.

Performance fees

New rules have been introduced per the consultation that implement best market practice – which provides that where a performance fee is specified in a prospectus, it must be calculated on the basis of the fund’s performance after all other charges have been deducted.

Timing

The new Handbook rules and guidance concerning benchmarks come into force on 7 May 2019 for new funds and on 7 August 2019 for existing funds. The new rules and guidance on performance fees come into force on 7 August 2019. The new provisions clarifying how COBS 4 applies to the key investor information document came into force on 4 February 2019. The FCA expects AFMs to take the non-Handbook guidance on objectives into consideration when reviewing fund documentation.

Unit-linked and with-profits business

PS19/4 is potentially relevant to unit-linked and with-profits business. The FCA states that it is carrying out a diagnosis of with-profits and unit-linked products which will be concluded later this year.

Other initiatives

The FCA has established a Fund Objectives Working Group (FOWG). As part of the working group, the Investment Association (IA) is working with its members, to promote the use of consistent terminology in communications from fund managers about their funds. The IA is expected to publish their guidance on fund communication in February 2019.

The FCA has also established an Institutional Disclosure Working Group (IDWG) which has recommended the use of five templates for data collection and disclosure by asset managers to institutional investors. Last November 20, the Cost Transparency Initiative was launched to take the recommendations of the IDWG forward, supported by the Pensions and Lifetime Savings Association, the IA and the Local Government Association.

In December 2018, the Competition and Markets Authority (CMA) published its findings that there is an adverse effect on competition in the investment consultancy market and the fiduciary management market from which substantial customer harm may result. The CMA’s Investment Consultants Market Investigation Final Report introduced a package of remedies to address the negative effects on competition they identified.

Comment

The new rules and guidance are a good illustration that one of the big issues facing the UK asset management industry is the assimilation of regulation change whilst managing the uncertainties around the shape of any Brexit deal. Whilst Brexit is taking all the headlines it is easy to forget that the rules and guidance of the AMMS are coming into effect this year.

The webex recording of our February 40 minute briefing, Buy-side focus, contains a useful timeline slide showing the implementation dates of the FCA’s rules which implement the AMMS. To access the recording, please click here.