Fund management companies must prove they give investors a worthwhile service for their fees as part of a raft of measure being introduced by the Financial Conduct Authority to ensure asset managers act in the best interests of their clients.
In a 74 page paper published today (5 April) the regulator said it will require fund managers to make an annual assessment of how their products provide value for the fees paid by investors.
However in a concession to the industry following feedback to its Asset Management Study, the FCA has tweaked the wording of its rules to shift focus away from the phrase "value for money" to a general requirement that fund managers "assess and justify to their fund investors the charges taken from the funds they manage in the context of the overall service and value provided".
Fund houses must assess the value of each fund against a non-exhaustive list of prescribed measures, conclude each fund offers good value to investors or, where it does not, take corrective action, all the while explaining the assessment annually in a report made available to the public.
The FCA paper pointed out there is an existing duty on authorised fund managers (AFMs) to act in the best interests of fund investors, including whether what they are selling is worth the price investors pay.
"AFMs are the agents of the investors in their funds; they are not just product providers," it said.
The FCA has been forced to act to strengthen the rules on the price investors pay for their money to be managed and increased with returns, however, because it found fund managers "generally do not consider robustly whether they are delivering value for money, despite their existing obligations".
Elsewhere in today's paper the FCA unveiled a measure to help the industry better provide the value for money it is demanding for investors, revealing it will not require firms to secure individual permissions before it moves clients to cheaper share classes.
The new rules will require firms to “make a simple one-off notification to investors, which does not require a response, a minimum of 60 days before a mandatory conversion”.
For financial advisers the big news is that the regulator has decided against banning trail commission on legacy investment products for the time being.
The regulator had been considering banning firms from receiving trail commission on existing products, but has now said it has “no plans” to change the existing rules.
On fund management governance, the FCA will now require all fund firms to appoint two independent directors to their board, despite receiving "extensive representations" from the industry lobbying against this requirement on the basis of cost. The FCA said it thinks the “costs are justified”.
The industry received some reprieve with all of the these rules, as the implementation period has been extended to 18 months, rather than the previous forecast of one year.
Firms will not be required to appoint an independent chair.
Christopher Wollard, executive director for strategy and competition at the FCA said: “The investment choices open to people, and the decisions they make on how to invest, can have a profound impact on their financial health.
"They can also have consequences for their families, as well as society as a whole.
"That’s why 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.
"Today’s announcements are an important part of a package of measures that, combined, aim to achieve a fair, transparent, open and accountable market.”
Kevin Doran, chief investment officer at AJ Bell said: “We support wholeheartedly the FCA’s drive to deliver better information and value to investors.
"For far too long, many fund providers seem to have forgotten just whose money it is they manage, hiding behind vague objectives and excessive charges.”
Andrew Strange, a director at consultancy firm PwC said the FCA has struck "a pragmatic balance between prescriptive rules and flexible guidance", adding the rules should be welcomed by the industry and consumers.
"Delivering value for money for investors has always been a key tenet of the asset management industry.
"Changes to focus on wider value, rather than just charges, will better enable firms to demonstrate this value to their customers, although the new public statements could risk overloading consumers with information.
"However, updating guidance to make it easier for firms to switch investors to cheaper versions of the same fund is an example of the regulator helping firms deliver value.”
David.Thorpe@ft.com
