The Financial Conduct Authority (FCA) has warned fund managers that it will intervene after a review of several fund managers’ Assessment of Value (AoV) statements revealed most had failed to meet FCA standards.
The FCA carried out a sample review of 18 fund managers covering different business models and sizes between July 2020 and May 2021 and found the majority had not implemented AoV arrangements and several practices had fallen short of expectations.
The findings showed many firms did not properly apply some of the minimum considerations, including performance and active fund management costs and classes of units, meaning that assessments were not properly completed.
The FCA said firms “often made assumptions that they could not justify”, undermining the credibility of their assessments.
Value assessments were introduced in 2019 after the regulator’s Asset Management Market Study found evidence of weak demand-side pressure in the market for authorised funds, resulting in a lack of competition among fund providers on fees and charges.
Details of these assessments should be reported to investors together with a clear explanation of what action has or will be taken if firms find that the charges paid by investors in the fund are not justified.
However, the FCA’s review found widespread failures, with some firms assessing value at fund level rather than by unit class as required.
The FCA said: “This meant firms potentially overlooked poor value, leading to some firms concluding high fee funds and unit classes provided value without firms completing an appropriate assessment.”
The FCA said its review had also found that when considering a fund’s performance, many firms did not consider what the fund should deliver given its investment policy, investment strategy and fees.
These firms often assess the value provided by a fund’s performance by comparing it with the fund’s stated objective, regardless of whether this objective reflected how the fund was managed. This was particularly apparent for funds that charge a fee commensurate with active management and managed with the aim of outperformance.
The FCA said: “Some of the independent directors on AFM boards did not provide the robust challenge we expect from them and appeared to lack sufficient understanding of relevant fund rules.”
The watchdog says it intends to review firms again within the next 12 to 18 months and will assess how well they have responded to feedback.
It cautioned: “We will consider other regulatory tools should we find firms are not meeting the standards we expect to be necessary to comply with our rules.”
