Regulation  

FCA warns fund managers after damning review of value assessments

FCA warns fund managers after damning review of value assessments

The Financial Conduct Authority has warned fund managers it will take action after a review found most have not implemented value assessments that met FCA standards.

The FCA conducted a review of 18 fund managers of different business models and sizes between July 2020 and May 2021 and found while some had been conducting value assessments well, “too many AFMs often made assumptions that they could not justify to us”, undermining the credibility of their assessments.

The regulator said: “When considering a fund’s performance, many firms did not consider what the fund should deliver given its investment policy, investment strategy and fees. 

“Firms spent a disproportionate amount of time looking for savings in administration service charges that cost investors relatively little compared with the time spent reviewing the costs of asset management and distribution that typically cost investors much more.”

It said other firms did not meet the standards the regulator expects by using poorly designed processes that led to incomplete assessments of value.

This included failing to assess elements such as fund performance, AFM costs and classes of units, or failing to perform assessments at share class level.

Value assessments were introduced in 2020 and require asset managers to carry out assessments of their performance, costs, economies of scale, comparable market rates, services and share classes every year.

They were introduced after the FCA discovered weak price competition and high fees in its landmark asset management review.

Details of the assessments are to be reported to investors together with a clear explanation of what action has been or will be taken if they find that the charges paid by investors in the funds are not justified.

Following its latest review the City watchdog today (July 6) explained that some of the independent directors on the governing bodies of AFMs did not provide the robust challenge that it expects and appeared to lack sufficient understanding of relevant fund rules.

“Overall, we expect more rigour from AFMs when assessing value in funds. This will help ensure that investment products represent good value,” the FCA said.

“We expect all AFMs to consider these findings and use them to assess their AoV processes. Where necessary, they should make changes to address shortcomings.”

The FCA plans to review firms again within the next 12 to 18 months and will assess how well they have reacted to its feedback. 

The regulator said it will consider other regulatory tools should it find firms are not meeting the standards that it expects to be necessary to comply with its rules.

Earlier this year, the CFA criticised the value reports, saying fund houses were failing to meet the "spirit" of the value rules.

The FCA had left the framework for such reports deliberately vague, instead simply mandating firms to look at their performance, costs, quality of service, economies of scale, comparable market rates, comparable services and share classes.

In the update today, it said: “We found AFMs used a wide range of operational practices to support their AoV processes. Our rules do not prescribe how an AoV is conducted, aside from specifying the seven minimum considerations and certain other matters.