Investments  

Fund rules aim to put clients first

Fund rules aim to put clients first

To quote George Gershwin, it is “summertime and the livin’ is easy” – but this has not been the case for those working in the product or compliance departments of an asset manager or the Financial Conduct Authority.

There has been an important deadline: August 7. Why is this date key? 

It was the deadline for asset managers to meet the requirements of the FCA’s PS19/4. For the uninitiated – or lucky, you could argue – this is a further set of remedies stemming from the Asset Management Market Study, which focuses on the area of fund objectives. 

As the authors of the AMMS stated, “we have concerns about how asset managers communicate their objectives to clients”. This was somewhat of an understatement.

While there is an appreciation that the objective has the invidious task of walking the tightrope between descriptor for the client and providing flexibility for the fund manager to manage the fund, it is without doubt that they have historically been written in a way to provide maximum flexibility to the fund manager, which in turn has led to very woolly objectives that are vague at best and in some instances totally impenetrable. 

There are a number of examples of these vagaries in their current format. For instance, a fund sitting in the UK All Companies sector may have an objective to deliver “growth”. What does that mean? How can it be measured? At a time when the industry is struggling to regain trust, it is essential that we embrace transparency and remove ambiguity and opaqueness in all our customer communications.

Key points

  • Last week saw the deadline for fund managers to meet new requirements over fund objectives
  • The regulations will make clearer what the fund is offering investors
  • Clients may receive communications from funds they invest in if the FCA deems it necessary before approving changes

The fund objective is a key part of the agreement between the client and the provider – where it is imperative there is a clarity of expectation and a timeframe over which it is looking to deliver.  

Without these essential criteria, what chance does the adviser or client have to assess the success or otherwise of the fund?

It is therefore understandable that the regulator has told the industry to improve in this area, providing a clear set of guidance on what should be included.

The August deadline was the date for all existing funds to have their objectives updated to meet the new criteria – the regulations have already been in force for all new funds launched post May 2019.

The new regulations aim to help investors to:

  • Have a better idea of what their fund does; and
  • Understand how they can evaluate a fund’s performance.

The objectives have regulatory significance with changes requiring careful consideration, as alterations need to be submitted to the FCA for approval, which then has one month to approve or raise questions and require amendments.  

There is an expectation these will be treated with the usual ‘traffic light’ system within the FCA handbook COLL section.

However, where the changes are purely seen as marginal, it is expected a number will be deemed as notifiable – where a communication exercise will need to be undertaken.

This is costly as most platforms charge for client communication exercises. In the event the changes are seen as fundamental, these will require a vote, which again has a communication cost but with the added complication of needing to obtain a majority of the shareholders to approve the change.