InvestmentsAug 14 2019

Fund rules aim to put clients first

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Fund rules aim to put clients first

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.

Advisers should be aware that this exercise is ongoing as it may result in clients receiving communications, which may lead them to question what this means.

There have already been some rumblings from the asset management community that there appears to be some inconsistencies in the treatment of submissions to different case officers at the FCA – only when the dust has settled will we be able to make a judgement on this.

To assist the industry in this exercise, the Investment Association has completed work with consumer representatives, which drew upon consumer testing led by the Wisdom Tree.

The purpose was to garner insight into how customers interact with the industry and how best to engage with them.

The result of this has been a guide providing recommendations on the types of language to be used in fund objectives and investment policy.

The regulator has made it clear that client communications need to move away from compliance laden documents to earnest attempts to share information.

It could be said that the regulator was the primary architect behind documents taking this form – however there does now appear to be a push from the regulator for the industry to engage and inform in clear understandable language.

The new guidance on objectives should help all those involved in providing investments – from the fund manager to the adviser. In essence, the objective should provide three elements:

  • A statement of what the fund is looking to deliver. It is acknowledged that this is simpler in some instances than others, that is, where sustainability is the primary goal, but a statement should be included to provide instruction on what is to be expected;
  • The time period over which the fund is looking to deliver this; and
  • A comparator so that an assessment can be made: is this fund doing a good job? 

Once this period of significant activity and deliberation has passed, the outcome should be the use of consistent terminology in communications from fund managers about their funds, which enable customers and their advisers to make easier comparisons with other funds.

The goal of setting clear expectations and providing regular updates on delivery against those will surely make “livin’ easy” for us and our clients, and then we can really enjoy what is left of summertime.

Steve Kenny is commercial director at Square Mile Investment Consulting and Research