Asset Management Market Study (AMMS) Policy Statement and further Consultation Paper and an Occasional Paper on fund charges disclosure

The FCA has had a busy time so far in April, with the publication of, among other things, Policy Statement PS18/8 on final AMMS remedies, Consultation Paper CP18/9 on further proposed AMMS remedies and Occasional Paper 32 on the disclosure of fund charges.

There is little in PS18/8 that has come as a surprise, as it has been well-flagged in the interim report and consultation paper, but that doesn’t mean the changes are any less significant.

There was a time when the then-FSA said that it was categorically not a price regulator.  Now, in the name of investor protection, it is coming very close to that by requiring Authorised Fund Managers (AFMs) to assess the value for money of every fund annually and to report on this to investors, based on at least the following metrics:

• Quality of service
• Performance
• AFM costs
• Economies of scale
• Comparable market rates
• Comparable services
• Classes of units

The apparent emphasis in the interim report on basing the value for money on the costs of running the fund has been removed and using a range of criteria makes it clear that “charges should be assessed in the context of the overall service delivered.”

A strengthened obligation on AFM boards to act in the best interests of their investors is to be enforced through the requirement for at least two independent directors and for them to represent at least 25% of the board.  One senior manager – likely to be the chairman – will be responsible for recruiting those independent directors and for ensuring that the firm acts in the best interests of investors and conducts the value-for-money assessment.

Other, less headline-grabbing but important, rule changes include the requirement for groups with dual-priced funds to reimburse the funds or individual investors with any risk-free box profits and the ability to switch investors into a cheaper – but otherwise identical – share class without first receiving explicit individual consent.

The FCA has stepped back from a proposal to switch off trail commission from pre-RDR business, at least for the time being.  As stated in PS18/8, they “are still considering the issue and have no immediate plans to bring forward proposals for policy change at this point”.

CP18/9 looks into how AFMs explain their funds’ objectives and investment policies, with the aim of making them less bland and more meaningful to investors.  This includes any constraints on portfolio construction, non-financial (e.g. responsible investment) objectives and the use of benchmarks.  It also proposes tightening up on how performance fees are calculated and applied.  The consultation is open until 5 July.

Occasional Paper 32 is the result of research the FCA commissioned into finding out how closely fund investors take note of fund charges and actively select a cheaper fund.  It won’t surprise anyone to hear that showing the effect of charges on returns and comparing them to other funds with different charges has a greater effect on consumer behaviour than simply a warning that charges will affect returns.

Given that PRIIPs now (and UCITS from the end of 2019) need to show the effect of costs on returns and MiFID II requires clients to be given regular illustrations of their effect on returns, it’s good to see the FCA feels the need to prove that this all has a beneficial impact on customer behaviour.

The key dates to note for the changes in PS18/8 are

• Bulk switches to cheaper share classes can take place now, subject to 60 days’ notice to unitholders
• Any risk-free box profits are to be reimbursed from 1 April 2019
• Value-for-money assessments/reports and the introduction of independent directors are required from 30 September 2019
• The requirement for a senior manager to be responsible for ensuring adherence with the new rules will coincide with the introduction of the Senior Managers and Certification Regime (SM&CR) – likely to be mid to late 2019.

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