Under the FCA’s Asset Management Market Study, the final report of which was published in June 2017, the City watchdog determined that price competition is weak in a number of areas of the industry.
A number of key regulators including ESMA, the CBI and the FCA have reviewed the market for potential hidden “closet tracker” funds and published their findings, with a number of funds providing inaccurate information in their investor disclosure documents as regards investment strategy.
While the FCA’s Assessment of Value (AoV) process is a new development in the UK market, a similar requirement on mutual funds has been in place in the United States for considerable time. The approach in the United States provides some useful comparisons to the new UK regime. The US fund governance model requires under Section 15c of the US Investment Companies Act 1940 for US fund boards to conduct an assessment on the fund managers using a number of factors commonly known as the Gartenberg Principles.
Whilst UK AFMs are currently busily engaged in the FCA Assessment of Value process of preparing their first reports, in this blog we give some thought as to where the FCA Assessment of Value requirements are likely to take us over the next few years.
The FCA’s terminology is FCA Assessment of Value, a shift from the earlier terminology of “Value for Money” which the FCA felt focused too much on the AFMs costs. Therefore, the focus from fund managers needs to be on the full value proposition for investors rather than focusing only on fund charges. Good value does not necessarily mean low cost!
In this, the second of our series on FCA Assessment of Value, we consider whether the FCA Assessment of Value process will lead to real change in product governance processes for the benefit of investors, or if firms will use this merely as a “tickbox” exercise to satisfy a regulatory requirement.
Performance of the FCA Assessment of Value process will be a significant challenge for firms. Bringing all data together in an efficient and meaningful way will be key to the success of the FCA assessment of value process.
Closet trackers, also known as closet indexing or index hugging, refers to the practice of fund managers claiming to manage portfolios actively when in reality the fund stays close to a benchmark. The issues around ‘closet trackers’ form part of a broader issue on the effectiveness of investor disclosure and the legitimate expectations of investors in respect of the service provided by some asset managers.