UK: Assessing Value For Money In Investment Funds

On 5 April 2018 the FCA published a policy statement, summarised in our recent blog, on its first round measures as part of its asset management market study. Particular interest has been generated by the new rules and prescribed responsibility this contains on assessing value for money. In this blog, we focus on these new rules and consider their implications for firms and senior managers.

What are the new rules?

Regulators at both EU and UK level are seeking to clamp down on poor value offerings through scrutinising governance and investor disclosures.1 To this end, the FCA will require authorised fund managers (AFMs) to assess the value for money of each fund, take corrective action if it does not offer good value for money, and explain the assessment annually in a public report.2 Moreover, under a new Senior Managers and Certification Regime (SM&CR) prescribed responsibility, a senior individual will be required to take "reasonable steps" to ensure that the AFM carries out the assessment of value and acts in the best interests of fund investors.

Given the inherent complexities and subjectivity of assessing value for money, only experience will tell whether the assessments required by these new rules will be sufficiently comparable to show investors which products offer the best value. However, firms offering products with particularly poor value may well struggle to justify their offering, and, as is the underlying policy intention, will be put under pressure to reduce fees, improve the quality of service, or move investors into better value share classes.

How should value for money be assessed?

In our view, for value for money assessments to be effective they need to be integrated into a firm's overall product governance process, including in pre-launch reviews and regular post-launch assessments. Value for money is integral to many of the product governance elements required under MiFID II and PRIIPs, including identifying a target market which would derive value from the product, setting a distribution strategy to reach that target market, scenario analysis to identify the risks of poor outcomes for clients, assessment of the impact of costs and charges on the product's expected return, and the transparency of the charging structure.

A firm's product governance process needs to be underpinned by effective board governance. To provide external perspective and challenge, the FCA has set out a new requirement for AFMs to appoint a minimum of two independent directors and for them to comprise at least 25% of the total board membership. Notably, however, the FCA has not insisted on a majority of independents.

What constitutes good value for money?

The FCA sets out seven factors that firms must consider when assessing the value for money of each fund:

  • Quality of service: the range and quality of services provided to investors;
  • Fund performance: this should be considered over an appropriate timescale given the fund's objectives, and should be measured net of fees;
  • AFM costs: the cost to the AFM of providing the service to which each charge relates;
  • Economies of scale: whether the AFM is able to achieve savings and benefits from economies of scale for larger funds;
  • Comparable market rates: the market rate for any comparable service provided by the AFM or to the AFM (including by delegated investment managers);
  • Comparable services: the AFM's charges for comparable services, including institutional mandates of a comparable size or funds with similar investment objectives; and
  • Classes of units: whether it is appropriate for investors to be in share classes with higher charges than those applying to other similar share classes of the same fund.

The FCA does not prescribe a level of charges that it considers to be acceptable. However, the cap of 0.75% per year that it has imposed on default funds in auto-enrolled workplace pension schemes gives an indication of the level of charges it considers reasonable for a type of fund that is likely to be relatively non-complex. The FCA also gives examples of where firms are likely to be offering poor value for money: these include expensive "partly active" funds and legacy pre-Retail Distribution Review (RDR) share classes where cheaper but otherwise identical classes exist. In practice, what the FCA judges to be an appropriate charge will depend on factors such as the complexity of the investment strategy, the potential out-performance of the fund, the size of the fund, and the availability of cheaper alternatives.

The FCA will expect firms to ensure good value for money not only in the annual management charge, but also in execution costs, research fees (if charged separately), and charges for other third party services. In 2017 the FCA found shortcomings in firms' oversight of best execution and research and it is expected to pursue these issues following the implementation of MiFID II.

The FCA emphasises that fund charges should be assessed in relation to the overall value delivered. Firms can assess fund performance in a variety of ways including the potential, as well as actual, out-performance of the fund against a benchmark; the actual risk-adjusted net return; customer satisfaction levels; and complaints volumes.

Recent research by Fitz Partners showed that a third of UK retail fund assets remain in share classes that pay rebates to financial advisers. The FCA is keen to see investors moved out of such legacy pre-RDR products. The new rules therefore remove the need for an AFM to get consent from each investor before converting them to a cheaper but otherwise identical class of the same fund. This will make it easier for firms to transfer investors out of legacy share classes and will allow firms to close expensive share classes in which only a small number of investors remain. Firms will, however, need to address any barriers to switching to better value products, such as exit fees or unnecessarily burdensome administration.

How should value for money be communicated to investors?

The FCA's recent behavioural testing on the effectiveness of costs and charges disclosures found that the prominence of such disclosures, and the type of information displayed, had a significant effect on decision-making. Firms should take this into account when considering how to communicate to investors the costs, performance and risks of their products.

Implications for Firms

The new requirements on value for money assessments will, as intended, be a key focus for boards and senior management, especially given the new prescribed responsibility and the requirement to make public the results of the fund assessments. Assessing value for money is by nature subjective, but the FCA has set out clear guidance on the factors that should be considered, as well as examples of where investors are likely to be receiving poor value for money. Firms may, however, face challenges in distilling a potentially complex value for money assessment into an easily digestible annual disclosure.

In our view, for value for money assessments to be effective, and to meet FCA requirements generally, they need to be integrated into a firm's overall product governance process, overseen by board governance with a substantial independent element, and communicated to investors in a clear and user-friendly way. These new rules are an important further instalment in a series of concerted regulatory initiatives on product governance and disclosure of fees and charges. We expect the FCA's supervision teams to scrutinise performance and outcomes in these areas firm by firm, and in depth.

Footnotes

1 Both the revised Market in Financial Instruments Directive (MiFID II) and the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation have introduced new requirements on product governance and investor disclosures. The European Securities and Markets Authority (ESMA) has also been scrutinising "closet-tracking" and disclosures on costs and past performance for retail investment products.

2 This can either be included in the fund's annual report or in a separate document published within 4 months of the fund's annual accounting period end date, effective for periods ending on or after 30 September 2019.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions