The Financial Conduct Authority has given fund houses six months to improve their disclosure practices in the latest set of rules following the watchdog's asset management market study.
Last year the FCA introduced new rules to ensure fund managers act as agents of investors in their funds, but today it has published new rules to help consumers understand more about how their money is being managed.
The regulator stated: "Objectives are not always as clear and helpful to consumers as they could be. We expect fund managers to explain what their funds are doing in consumer-friendly language.
"Clear and helpful objectives should mean better informed consumers making decisions to invest in funds that are more suited to their individual needs and expectations."
The regulator said it considered the current rules were adequate, but the study aims to provide clarity on what it expects from fund houses.
Under the new rules, fund houses will be required to explain why or how their funds use particular benchmarks or, if they do not use a benchmark, how investors should assess the performance of a fund.
Fund managers who use benchmarks will be required to reference them consistently across the fund's documents and require fund managers who present a fund’s past performance to do so against each benchmark used as a constraint on portfolio construction or as a performance target.
The FCA said many investment houses had complained that such rules would place too onerous a burden on them, but the regulator rejected this.
It added that since it was not forcing funds to have a recognised benchmark, it did not expect costs to be higher.
The FCA said: "We agree that some funds will not be managed with reference to a benchmark. There may also not be a readily available benchmark that corresponds with the way a fund is run. However, fund managers must still be able explain how else to assess their fund’s performance.
"We do not agree that where a fund has no benchmark, it should be up to the investor to assess a fund’s performance. We want investors to get improved information to explain what a fund does, how it does it and how to evaluate how well it is doing.
"The use of benchmarks is not mandatory and we do not expect fund managers to refer to a benchmark if it is not relevant to the way a fund is run.
"Our rules do not require or encourage fund managers to use benchmarks, but will require that fund managers explain why they have chosen a particular benchmark."
The regulator said most of the fund houses that responded to the study supported the idea of ensuring that performance fees are only levied on the returns have been achieved, and said it is already regarded as best practice.
Christopher Woolard, the FCA's executive director of strategy and competition, said: "We’re working to make competition work better in the asset management market and protect those least able to actively engage with their investments.