UK-based fund managers will face tough new disclosure and governance rules next year in the wake of a regulatory investigation that has left trail commissions on the table – for now.
In its final rule rewrite released early in April, the UK Financial Conduct Authority (FCA) has stuck by most of the original proposals announced last year including the requirement for fund managers to disclose ‘value for money’ information to investors.
However, the FCA has put a hold on sideline issues such as banning trail commissions.
“We are still considering the [trail commission] issue and have no immediate plans to bring forward proposals for policy change at this point,” the FCA report says.
The UK regulator will conduct further “diagnostic” work on including unit-linked insurance funds under the new while listed investment trusts remain on notice.
“We are keeping the possibility of further changes to investment trust governance arrangements under review, but we do not plan any immediate action on this,” the FCA says.
The changes, due to be phased in next in a delayed timetable, cover five core areas:
- ‘value for money’ (VfM) assessment and reporting to all investors;
- the requirement for independent directors (with a minimum of two) to represent at least 25 per cent of fund manager boards;
- new ‘prescribed responsibility’ standards making senior management and board chairs accountable for meeting regulatory objectives;
- paying ‘box profits’ – or fund manager margins earned by trading certain in-house assets – back to the respective funds; and,
- making it easier to shift investors from high-fee funds to similar lower-cost options without requiring consent from all unit-holders.
According to the FCA, its previous research found UK fund managers as a rule “do not consider robustly whether they are delivering VfM”.
Under the new disclosure requirements fund managers “must assess the VfM of each fund against a non-exhaustive list of prescribed elements, conclude that each fund offers good VfM or take corrective action if it does not, and explain the assessment annually in a report made available to the public”.
The rules also compel managers to disclose how they distribute, or not, any ‘economies of scale’ to investors. Funds management businesses may reinvest “savings achieved through economies of scale into the business, subsidising other parts of the business or covering development costs”, the FCA says.
“However, firms will have to explain these decisions in the annual report and show how these decisions, along with others flowing from the assessment, are in the best interest of the investors,” the report says.
The regulator has made some minor concessions such as allowing managers to disclose charges “in the context of the overall value delivered” and pushing out the implementation date by six months to late in 2019
In a statement, Christopher Woolard, FCA executive director of strategy and competition said: “Today’s announcements are an important part of a package of measures that, combined, aim to achieve a fair, transparent, open and accountable market.”
But wait, there is more…
Earlier this month the FCA also released a new consultation paper and how funds disclose objectives and use investment benchmarks.
“We propose that if a fund has benchmarks, their use must be explained and referenced consistently in consumer facing documents,” the sequel FCA discussion document says, including how they are applied to performance fees.
“… We are consulting on amending our performance fee rules to clarify that we expect performance fees to be calculated on performance net of other fees in all cases,” the FCA says.
The new FCA consultation coincides with ongoing formal reviews of the UK investment consultancy sector and a study of the platform market due for publication in a few months.
According to the FCA, the UK funds management industry is the second-largest in the world with total assets of about £8.1
“Over £1 trillion is managed for UK retail investors and £3 trillion on behalf of UK pension funds and other institutional investors,” the FCA says. “The industry also manages around £2.7 trillion on behalf of overseas clients.”