The UK’s Asset Management Market Study (AMMS) is gathering pace. The FCA has now published a policy statement (PS18/8), setting out feedback on its earlier consultation, and final rules implementing some of the remedies identified in the AMMS on April 5, 2018. It has also published a new consultation paper (CP18/9) on further remedies under the AMMS, which is open to comments until July 5, 2018.
Key points in the policy statement
The FCA has redrafted its final rules concerning the assessment by an authorised fund manager of “value for money” for investors. The regulator has clarified that fund charges should be assessed in the context of the overall value delivered, rather than using the term “value for money”. Authorised fund managers (AFMs) will have to publish an annual statement within four months of the relevant accounting period describing their value for money assessment. AFMs are not expected to disclose information which is commercially sensitive or anticompetitive but they must comply with the FCA requirement that communications are fair, clear and not misleading. The FCA has decided to extend the implementation period for the value for money requirement from 12 to 18 months (September 30, 2019).
The FCA has also published final rules requiring an AFM to appoint a minimum of two independent directors and for them to comprise at least 25 per cent of the total board membership. The FCA has set out detailed rules on who will be classified as independent. Independent directors can sit on more than one AFM within a group. However, time served will be calculated on a group basis. An independent director can serve a term of up to five years (renewed once to a maximum of ten years) within one group, starting from the time of the first appointment. The new requirements come into effect from September 30, 2019.
The FCA has updated its guidance making it easier for fund investors to be moved (converted) to cheaper but otherwise identical classes of the same fund. The recast guidance removes the need for the AFM to get individual consent from each investor before converting them. The recast guidance now recommends AFMs make a simple, one-off notification to investors, which does not require a response, a minimum of 60 days before a mandatory conversion. The recast of Final Guidance 14/4, now known as Final Guidance 18/3, is now effective.
Some AFMs, especially those offering dual-priced funds, may operate a “manager’s box” which is a mechanism whereby an AFM, using its own capital, stands between the fund and those investors who are entering or leaving the fund, rather than the investors transacting directly with the fund. Whilst acknowledging that the use of a manager’s box can be compatible with acting in the best interests of investors there is a concern that AFMs might be profiting from it unfairly. There is no explicit rule in the FCA’s Collective Investment Schemes sourcebook (COLL) that allows profits to be made from box management, although the language in COLL 6.2.9G implies that the manager could keep risk-free box profits. The FCA has now published final rules to require the AFM not to retain risk-free box profits and to allocate them in a way that is fair to unitholders, while removing the obligation to pay them to the fund. The new rules come into effect on April 1, 2019. Detailed commentary on risk-free box profits rules and guidance can be found in Annex II of PS18/8.
The FCA has asked questions about whether it should continue to allow the payment of trail commission. The FCA reported in PS18/8 that it is still considering the issue and has no immediate plans to bring forward proposals for policy change.
Key points in the consultation paper
To deliver improved fund disclosures the FCA proposes to: (1) publish guidance reminding AFMs how they should express fund objectives and investment policies to make them more useful to investors. Firms should, when describing the objectives of their funds: (i) explain clearly what they are looking to achieve and how; (ii) explain the constraints that the fund’s portfolio construction may be under; and (iii) explain any non-financial objectives they have, for example the environmental or social objectives of an investment, and how they will measure and report progress against these objectives; (2) make new rules so that AFMs must explain why they use benchmarks, or if they do not, how investors should assess the performance of the fund; (3) require that, if an AFM uses benchmarks, the benchmarks must be referenced consistently across the fund’s documents and, wherever the AFM presents the fund’s past performance, benchmarks used as a constraint on portfolio construction or as a target must be presented alongside the past performance; and (4) amend its performance fees rules to provide that performance fees must be calculated on performance net of other fees in all cases. The deadline for responding to CP18/9 is July 5, 2018.
The FCA consultation does not cover the all-in fee and the possible standardisation of disclosure of fees and charges. On the latter, the FCA has published an Occasional Paper (OP32), which considers the impact of different ways of presenting information on investors’ decision making and understanding. OP32 does not put forward any specific policy proposals but is designed to encourage debate and inform the FCA’s next steps.