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The FCA's sustainable warning for wealth managers; Finding room for premium pricing

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Sustaining the pace

It didn’t take the FCA long to act on the promise it made last week to ensure fund firms’ ESG commitments are clear, fair and not misleading.

Following on from last Thursday’s business plan, the regulator has today published guiding principles on the design, delivery and disclosure of ESG funds. These guidelines, as well as the criticisms that inform them - many applications for authorisation are "poor quality and fall below...expectations” - suggest asset managers have plenty to do to avoid sanction in future.

Impact funds are, reasonably enough, being held to a particularly high standard. Per today's release, these strategies should only be labelled as such if they seek a “non-financial (real world) impact”, which in turn should be measured and monitored by the asset manager.

The spotlight is also shone on funds that invest in companies contributing to “positive environmental change” – a phrase that, coincidentally enough, is used by more than one sustainable fund favoured by DFMs.

The regulator says these funds should make clear how holdings and stewardship policies contribute to outcomes relating to biodiversity and the climate transition.

But these aren’t isolated examples: more detailed, and more regular, explanation is the overriding theme of the guidelines.

That’s in keeping with the ‘assessment of value’ ethos brought in by the regulation in recent years. But it looks like disclosure requirements will be more stringent for ESG funds and their ilk. Information on how funds are meeting their sustainable objectives should be made available to consumers at least twice a year, according to the watchdog.

What does all this mean for fund selectors? Professional buyers like DFMs have tended to avoided much of the regulatory scrutiny applied to both asset managers and advisers over the past decade. Yet there is also a warning sign for them in the guidelines.

The FCA says naming conventions like ‘ESG’, ‘sustainable’, ‘responsible’, ‘impact’ and the like could be misleading unless funds pursue these outcomes in a substantive and material way. Of course, buyers already apply these considerations to the strategies in which they invest for their clients. Yet the regulator’s newfound ESG focus suggests there’s increasing pressure on all those who use such terminology - not just the underlying managers.

In search of justification

There were other nuggets of interest in the regulator’s business plan last week, though Nikil Rathi’s speech on the FCA’s transition to becoming a “more assertive” regulator didn’t provide too many insights for the DFM space.

Understandably, when it came to investment issues the chief exec focused much of his attention on the possible risks of fraud and speculation. To that end, he did highlight the possibility that the definition of a high-net-worth investor be made more stringent – as first flagged last year.

Most HNWIs who find themselves in trouble do so via unregulated intermediaries: tightening up these definitions might ultimately direct more well-off individuals towards the relative safety of a regulated wealth manager.

When it comes to more specific metrics, the watchdog highlighted falling active and passive fund fees as signs that its recent work “may be leading to improvements in competition”. But the fact that AUM-weighted passive fees have fallen by half since 2015, while active fund prices have seen a much slower decline, emphasises there are other catalysts at play here, too.

To an extent, fund buyers are still prepared to pay up for strategies that offer something a little different – as the Brevan Howard episode earlier this year demonstrated.

In this context, the FCA’s promised efforts to “identify funds that are outliers to their peers – for example, due to high fees” can be viewed in two ways. Perhaps the regulator really is going to be much more assertive in leaning on such firms. Equally, some fund managers will still be able to point to persistent demand for certain premium-priced products.

More property pondering

A final note for today’s regulation-themed edition: the potential day of reckoning for open-ended property funds draws nearer. The FCA said earlier this year it would wait until the third quarter to publish its final proposals regarding notice periods, in order to take into account the feedback to its separate long-term asset fund consultation that subsequently closed last month.

Might the business plan have provided a glimmer of hope for property managers? The regulator was still non-committal on whether it will proceed down its proposed route. The question, perhaps, is whether the sight of so much money leaving reopened funds will be interpreted as a reason to change course, or a sign that those who disagree with the plans have already upped and left anyway.

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