Ouch! FCA delivers another blow to AFMs with Assessment of Value review

Under the AoV rules, firms must consider, when assessing the value offered and whether fees and charges can be justified, the range and quality of services provided to investors.

During the review, the FCA observed some firms not considering the quality of the investment process as part of this consideration of quality of services. Instead, many firms judged the investment process through the lens of performance only.

Additionally, it was found that many firms considered the quality of service only at a firm level, rather than by fund and unit class. The requirements under COLL 6.6.20R(2) which requires a separate assessment for each unit class was a common theme throughout the FCA feedback.

In terms of AFM Costs, the Assessment of Value rules require firms to make an assessment in relation to each charge, the cost of providing the service to which the charge relates, and when money is paid directly to associates or external parties, the cost is the amount paid to that person.

Once again, some positives came out of the review, however, this positivity was concentrated to firms with overseas parents – more specifically those from US groups. These firms were found to have benefited from their parent companies previous experience with dealing with years of board disclosures required under section 15c of the US Investment Company Act.

More on 15c here:

However, although the FCA feedback started on a positive note, they also found many firms had incorrectly implemented this consideration, with some comparing total fund charges with those of competitors, rather than considering fees and charges incurred by investors in the context of costs incurred by the AFM in operating the fund.

Additionally, some firms used assumptions that the firms could not justify.

COLL 6.6.20R requires firms to consider whether the AFM is able to achieve savings and benefits from economies of scale, relating to the direct and indirect costs of managing the scheme property and taking into account the value of the scheme property and whether it has grown or contracted in size as a result of the sale and redemption of units.

In terms of this consideration, the FCA found that most firms acknowledged that economies of scale arise at both fund and firm level. However, some have made very little progress in developing a methodology for measuring them to date.

COLL 6.6.21R(6) considers comparable services and requires an assessment in relation to each separate charge, the AFM’s charges and those of its associates for comparable services provided to clients, including for institutional mandates of a comparable size and having similar investment objectives and policies.

The FCA review found that firm typically did not consider whether the additional fees paid by the authorised funds versus those paid by segregated mandates could be justified by the complexity of the additional service levels.

Additionally, some firms did not compare fund charges with those of segregated mandates, despite appearing to manage similar-sized mandates with similar investment objectives and policies.

The combination of COLL 6.6.20R/COLL 8.5.17R and COLL 6.6.21R(7) requires firms to justify fees at unit class level, taking into consideration whether it is appropriate for investors in one class to pay more than is charged by other classes with substantially similar rights.

Overall, the FCA found good progress in this area, with many firms using the AMMS remedy to switch investors in bulk to cheaper unit classes where there was no obvious reason why they should continue paying more to be in the existing class.

However, once again the FCA found this was another consideration where some firms did not implement the AoV rules correctly, with some firms checking whether investors were in the cheapest class given the size of their investment and the distribution channel used to sell the fund to them.

Quality of reporting was one area the FCA’s feedback was relatively positive. As per COLL 4.5.7R(8) and COLL 8.3.5AR(5), firms are required to issue an annual report setting out a description of the assessment of value. This must include a separate discussion and conclusion for each of the minimum considerations, a conclusion on whether fund fees are justified in the context of overall value delivered, and an explanation of actions taken or to be taken, where this is not the case.

The FCA’s positive feedback in this area perhaps highlights the issue of the small sample size of only 18 firms used in the assessment and it contrary to what we have seen. During our review, we found that many firms required a deep dive into their website to locate the relevant AoV documents, whilst others opted to provide the statement hidden in the middle of an annual report.

Additionally, in terms of quality of reporting, we were surprised by the lack of feedback around readability and coherence. Effective communication to improve consumer choice and decision-making is something the FCA have aimed to achieve. Striking the right balance between an informative assessment and information overload certainly seems to have been a major challenge faced by many managers we reviewed.

COLL 6.6.25R and COLL 8.5.20R require AFMs to appoint INEDs who are independent in character and judgement, and have sufficient expertise and experience to make judgements on whether the AFM is managing the fund in the best interests of unitholders. The role of the INED should include providing input and challenge as part of the AoV process. Firms should consider whether their INEDs are demonstrating these capabilities and behaviours.

Contrary to the above requirement, the FCA found that many of the INEDs did not have a good understanding of the AoV rules or of the role expected of them.