The Financial Conduct Authority has said fund managers should be clearer about what they want their funds to achieve and how they will achieve it.
The regulator has proposed a series of new rules about fund objectives to make it easier for investors to choose the right fund for them.
It has also proposed explicitly banning the practice of charge performance fees on gross performance, that is before other charges such as the fund manager's fee have been reduced.
As part of the FCA's proposed rules on fund objectives, managers should explain the aims of a fund and how it will achieve them.
They should also explain any constraints on the fund, such as when the investment mandate explicitly limits the freedom of the manager to differ from the weightings in a benchmark.
Funds will also be obliged to set out any non-financial objectives "clearly and in full", for example if the fund seeks to achieve an environmental or social return or an improvement in the governance of the companies in which it invests.
The FCA said: "Objectives are often set out in language that, although factually correct, does not explain to an investor, in clear language, what the fund is doing. In addition they are often not specific and may omit important information about how the fund is run.
"Funds operating quite different investment strategies sometimes explain their objectives in the same overall terms. This makes it hard for investors to compare different funds.
"The use of jargon and technical language also makes it difficult for a retail investor to understand what a fund is aiming to achieve and how it will go about doing this."
The FCA said it had found examples of firms simply copying out the fund prospectus when it described its objectives, meaning its description included phrases like "transferable securities" and "collective investment schemes" which investors might struggle to understand.
On the issue of performance fees, the FCA said it is currently not prohibited by a rule for a fund manager to charge on gross performance, meaning that in theory, if a fund manager can show taking fees in this manner is fair, then it could be permitted.
But the FCA said: "In our view it is not in the interests of investors for authorised fund managers to take performance fees on a gross basis. This is ‘a fee on a fee’ and is unlikely to be understood by investors."
The FCA also proposed rules on benchmarks, requiring fund managers to explain why they use benchmarks, or if they do not, how investors should assess the performance of the fund.
If a fund manager uses benchmarks, the FCA has proposed that these must be referenced consistently across the fund’s documents and, wherever the manager 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.
The FCA said: "We have found that fund managers rarely explain why or how they are using particular benchmarks.
"Examples of how they might be using a benchmark include that a benchmark has been chosen to constrain how they construct the portfolio of a fund; that the fund is targeting the performance of a benchmark; or that the fund manager is inviting investors to compare a fund’s performance against a particular benchmark or benchmarks.
"Some fund managers present their funds’ past performance against different benchmarks in different consumer documents. This could confuse investors, and may flatter the performance of a fund. If investors try to choose funds based on confusing or contradictory information they may choose the wrong funds for their needs or have incorrect and inaccurate expectations."
The consultation on these proposals runs until Thursday 5 July 2018.
damian.fantato@ft.com
