A package of measures unveiled by the watchdog, designed to ensure retail investors get value for money, will also require firms to introduce two independent board directors, do more to ensure benchmark presentation is accurate, and pass on economies of scale more effectively.
Charges
The FCA said it continued to back the idea of a single all-in fee for fund investors, but added it would do more work on the subject in light of forthcoming Mifid II requirements that also require an all-in fee.
"We are testing ways to improve the effectiveness of any forthcoming disclosure, in order to understand the role of the prominence and formatting of charges information in encouraging investors to focus on the impact charges have on their investments."
"We are also considering whether to consult on guidance in areas such as the wider use of pounds and pence disclosure on other information sources."
Switching
Separately, the final report outlined new rules around share class switching, and the banning of controversial techniques such as firms' keeping risk-free ‘box profits’ for themselves. The FCA has launched an immediate consultation paper on these changes and the planned overhaul of fund governance.
Potential reforms include allowing fund groups to move investors into cheaper share classes without their consent and introducing a sunset clause on trail commission.
“Where multiple classes are available for a given fund, the authorised fund manager must assess and explain why some investors are in more expensive classes, with substantially similar rights and conditions,” the FCA added.
Governance
The regulator has proposed to increase industry oversight measures.
As part of this, it has called for an increase in the level of independence at board level, with a requirement for a minimum of two independent voices. Boards may also be required to assess “whether value for money has been provided to fund investors”, with an ongoing process involving formal documentation at least once a year.
The FCA said it expected "around 480" independent directors to be required across the industry as a result of its proposal.
A requirement for more independent boards with stronger mandates would help alleviate many of the issues found in its interim report, the regulator added. These include the finding that £109bn of assets were being held in portfolios charging active-fund prices but whose returns closely follow an index. Fund managers may be required to explain pricing in relation to a fund's objectives in future.
Economies of scale, fund objectives and ratings
Under other proposals, fund managers would also be required to identify economies of scale in the direct and indirect costs of operating funds and consider the introduction of “break points” at which fund charges are lowered. They may also have to consider whether savings should be shared with investors, with those not passing on such savings forced to explain their decision.
In addition, the FCA will chair a working group to examine how to make fund objectives clearer and more useful for investors, in a bid to reduce the information disconnect between fund group and investor. The watchdog also plans to crack down on the habit of using inconsistent benchmark measures.
But there appear to be be limited ramifications for the fund ratings industry following critical comments in the interim report last November. The FCA said while it still believed fund raters played a role in creating barriers to entry, they simultaneously opened doors for other fund managers.
