Poor product assessment and conflicts of interest mean fund managers are not consistently delivering good value to retail investors, the City-watchdog has warned.
In a Dear CEO letter to asset managers, published today (January 22), the Financial Conduct Authority warned the fund management sector needed to “progress” in order to effectively protect and grow its customers’ capital.
The FCA raised concerns about the way products were designed, emphasising that the product should not include features that were manifestly not in the interests of customers.
Such products included funds which tracked an undisclosed index or where the fees paid by the consumer exceeded the returns targeted by the provider.
Rules surrounding value for money and product governance were ushered into the investment sector via Mifid II which came into effect in January 2018. The FCA is in the process of reviewing how effectively the provisions have been implemented.
Just today advisers were warned the regulator could be set to crackdown on Prod rule compliance.
The FCA also pointed to the outcomes of the Asset Management Market Study in June 2017, which it said should have prompted asset managers to think differently about their "obligations to the end investors" by assessing the value of their funds.
If done properly, the process could result in "substantial improvements" to investor outcomes, according to the watchdog.
The letter also said overall value for the consumer was lost when the investment management was outsourced by the authorised corporate director of the fund, as this could cause a conflict of interest.
When the fund management is provided by an authorised fund manager but the ACD is in charge of overseeing the fund, a conflict of interest could arise if the ACD is worried about a loss of revenue from the AFM if it were to challenge the manager too much, the FCA said.
The letter said: “We are concerned that ‘host’ ACDs may not be undertaking their responsibilities effectively in some cases, leading to poor value products and them failing to ensure risks are properly managed.”
Asset managers were also urged to tackle liquidity issues within their funds.
Problems surrounding illiquid assets in open-ended funds were highlighted twice last year; first with the suspension of the Woodford Equity Income fund and again when M&G gated its property portfolio at the start of December.
In the aftermath the FCA promised action "within weeks" and later issued a joint report with the Bank of England which floated proposals to curb the "mismatch" between redemption terms and funds' liquidity.
The watchdog has also previously written to AFMs outlining its expectations regarding liquidity management.
In today’s letter, the FCA said: “We expect you to take any necessary or appropriate action following these communications. We will continue our oversight of UK authorised funds.
“Where we identify potential liquidity issues in funds, including through our regular interaction with depositaries, we will ensure that AFMs take prompt action to mitigate or resolve them.”