Introduction

On 5 April 2018, the FCA published its latest documents in response to the concerns it previously identified in its asset management market study. The documents comprise:

PS18/8

PS18/8 follows Consultation Paper 17/18: Consultation on implementing asset management market study remedies and changes to Handbook (CP17/18) (our blog is here) and sets out feedback and final rules and guidance.

Governance proposals

In CP17/18 the FCA consulted on proposals to strengthen and clarify an authorised fund managers’ (AFMs) duty to act in the best interests of fund investors. Specifically, the FCA said that they must assess the value for money (VfM) of each fund against a non-exhaustive list of prescribed elements, conclude that each fund offers good VfM or take corrective action if it does not, and explain the assessment annually in a report made available to the public. In PS18/8 the FCA reports that stakeholders agreed that value is at the heart of the asset management proposition but there were concerns over the regulator’s drafting. The FCA states that it has considered the feedback to CP17/18 carefully and still believes that the core of its policy is correct – that agents should be accountable to their underlying beneficiaries on how they deliver value. However, the FCA also accepts that its draft rules could be seen as too focused on AFMs’ costs rather than the full value proposition of funds, which was not its intention. The FCA has therefore redrafted its final rules to clarify that fund charges should be assessed in the context of the overall value delivered, rather than using the term ‘value for money’. The FCA has also decided to extend the implementation period for this requirement from 12 to 18 months (30 September 2019).

Independent directors

In CP17/18 the FCA proposed rules requiring AFMs to appoint independent directors to their board. The FCA proposed that AFMs appoint a minimum of two independent directors and for them to comprise at least 25% of the total board membership. The FCA thinks that the introduction of independent members to AFM boards will lead to better outcomes for investors, so it has made final rules introducing this requirement as consulted on. The requirement comes into effect from 30 September 2019.

Senior managers’ regime

In CP17/18 the FCA consulted on a new prescribed responsibility that would make clear that a senior manager, usually the chair of the board of an AFM, must take reasonable steps to ensure that the firm complies with its obligation to carry out the assessment of value, the duty to recruit independent directors, and the duty to act in the best interests of fund investors. The FCA reports that after considering the feedback it has decided to introduce the prescribed responsibility for AFMs as part of the extension of the senior managers’ and certification regime (SM&CR). The FCA intends to publish the final rules on the extended SM&CR later this year. The FCA expects the prescribed rule to come into effect at the same time as the rules extending the SM&CR which is expected to be in mid to late 2019.

Share classes

In CP17/18 the FCA consulted on changes to its guidance to make it easier for fund investors to be moved (converted) to cheaper but otherwise identical classes of the same fund. The FCA has now published final recast guidance which removes the need for the AFM to get individual consent from each investor before converting them. The recast guidance now recommends AFMs make a simple, one-off notification to investors, which does not require a response, a minimum of 60 days before a mandatory conversion. The recast of Final Guidance 14/4, now known as Final Guidance 18/3, is effective from the date of publication of PS18/8.

Trail commission

In CP17/18 the FCA asked questions for discussion about whether it should continue to allow the payment of trail commission. The FCA reports that it is still considering this issue and has no immediate plans to bring forward proposals for policy change.

Box profits

The FCA found that the managers of some dual-prices authorised funds were making a risk-free profit when dealing as principal in the units of their funds. In CP17/18 the FCA proposed that these profits should be repaid to the fund, for the benefit of investors. The FCA has proceeded with its proposal while making some technical changes to the rules and guidance. It is also allowing some flexibility in how risk-free profits should be allocated fairly and in the interests of investors. The rules on box profits will come into effect on 1 April 2019.

Extending the governance proposals to other investment products

In PS18/8 the FCA reports that views were mixed as regards extending the governance proposals for the authorised funds market to other investment products and investment trusts. The FCA has planned diagnostic work into with-profits and unit-linked products that will improve its view of any harm that exists in these markets. The FCA expects to reach a view on whether further intervention is required in the first half of 2019. The FCA is also keeping the possibility of further changes to investment trust governance arrangements under review, but is not planning any immediate action. Consistent with its earlier consultation, the FCA is not bringing forward proposals on extending the governance proposals to pensions at this time.

CP18/9

CP18/9 is the FCA’s second consultation paper proposing changes following the regulator’s asset management market study. The proposals in CP18/9 apply to UK AFMs, in respect of their management of authorised funds (open-ended collective investment schemes).

CP18/9 proposes measures to improve the quality, comparability and robustness of information available to investors. They seek to address the regulator’s concern that fund objectives are not as clear or specific as they could or should be. The FCA is also consulting on proposals to ensure that benchmarks are used appropriately. The FCA proposes that if a fund has benchmarks, their use must be explained and referenced consistently in consumer facing documents. This includes a proposal to ensure that benchmarks are shown appropriately and consistently against fund past performance.

To deliver improved fund disclosures the FCA proposes to:

  • publish guidance reminding AFMs how they should express fund objectives and investment policies to make them more useful to investors. Firms should, when describing the objectives of their funds: (i) explain clearly what they are looking to achieve and how; (ii) explain the constraints that the fund’s portfolio construction may be under; and (iii) explain any non-financial objectives they have, for example the environmental or social objectives of an investment, and how they will measure and report progress against these objectives;
  • make new rules so that AFMs must explain why they use benchmarks, or if they do not, how investors should assess the performance of the fund;
  • require that, if an AFM uses benchmarks, the benchmarks must be referenced consistently across the fund’s documents and, wherever the AFM presents the fund’s past performance, benchmarks used as a constraint on portfolio construction or as a target must be presented alongside the past performance; and
  • amend its performance fees rules to provide that performance fees must be calculated on performance net of other fees in all cases.

The deadline for responding to CP18/9 is 5 July 2018.

OP32

OP32 describes an experiment that was undertaken to help the FCA understand the impact of different ways of presenting charges on investors’ decision-making and their understanding and awareness of charges. The experiment covered a simulated online platform with over 1,000 non-advised investors to test the impact of four ways of presenting charges. The results from the experiment highlight that simply providing consumers with information does not guarantee that they will use it in their decision-making. However, presenting understandable and engaging information in a prominent way can increase the effectiveness of disclosures.