“This is a great initiative by the FCA on transparency, but…”

by | Apr 6, 2018

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The policy statement from the FCA on the Asset Management Market Study caused a great deal of comment. Here’s a select few.

Niral Parekh, Head of UK Retail Asset & Wealth Management at ‎Capco:

Value for money (VfM)

“This is a great initiative by the FCA on transparency but it is conceivable that the industry as a whole will take some time to implement this given the balance that needs to be struck on detailing complex performance calculations and cost mechanics in ‘plain English’ to the end investor. Specifically, what is ‘value’ to one investor group may not necessarily be ‘value’ to the other. Nonetheless, we see an opportunity in enhanced investor relations/communications and also a role for behavioural analytics to further augment an asset manager’s understanding of investor behaviour and needs. We are entering the ‘highly personalised’ age in the asset management industry, and technology providers may play a huge role to demystify what has been hitherto considered nebulous.”

Independent directors to the board

“Whilst the industry may welcome this proposal, the cost/benefit of additional appointments to smaller funds are still unclear, as what sway independent directors may carry on AFMs and what value they will bring to governance remains to be seen. Nonetheless, this initiative could provide an impetus to remove certain conflicts that exist in the governance structures.”

Box profits

“The devil here is in the detail given the myriad of industry models for calculating and reporting ‘box profits’. Introducing this against a set of standard rules by April 2019 may be a challenge unless there is a mix of tactical and strategic initiatives taken by the firms.”

Sean Hagerty, Head of Vanguard Europe:

“Vanguard welcomes today’s announcement. A more competitive UK asset management industry, with robust governance oversight, will significantly improve the financial well-being of millions.

“In particular, we note the FCA’s emphasis on the importance of “disclosing costs and charges in a meaningful way”, and its intention to consider changing rules and guidance to mandate certain forms of disclosure in light of the ongoing Investment Platforms Market Study. Vanguard has long championed the belief that information on costs should be equally, if not more prominent, than performance given the role costs play in investors’ eventual outcomes. Every pound paid in fees is a pound less of return for investors, yet the evidence published in the FCA’s Occasional Paper 32 continues to show that the average investor in the UK struggles to understand fund changes.

“The FCA’s proposed “treatments”, including a “cost warning” – an idea also advocated by Vanguard, have the potential to put investors in a better position to understand how their investments could perform, and how they are performing. Vanguard has been conducting its own research into effective disclosure methodologies and looks forward to exploring the FCA’s research and conclusion in depth.

“It is also pleasing that the FCA is making it easier for retail investors to move into better value share classes. Previously, investors may have been held in more expensive pre-RDR “bundled share” share classes when lower cost “clean” share classes may have been more appropriate.”

Jonathan Miller, Head of UK Manager Research at Morningstar:

“We welcome the steps on clearer transparency based on fund objectives, constraints and benchmarks, which will benefit investors. There are also issues which have bothered us that are to investor detriment, including box profits going back to the fund group and being allowed to take performance fees on a gross basis. We’re pleased to see actions to reverse these. We applaud the measures, that will further strengthen the attraction of mutual funds as vehicles that can help investors with their long term financial and life goals.”

Dan Brocklebank, Head of UK at Orbis Investments:

“It’s encouraging to see that the FCA remains supportive of innovative fee models which help improve the alignment of interests between managers and their clients. That’s what really matters at the end of the day.”

This refers to CP 18/19 in which they mention performance fees:

“There is substantial innovation in fund performance fees in the UK market at the moment, especially the development of more symmetrical performance fee models. These are fees that try to better align AFM and fund investors’ interests to the risks and reward of fund performance. For example, such structures reduce the fees payable to the AFM in the case of poor fund performance. We do not wish to inhibit such innovation where it is in the interests of investors. As a result we are not proposing significant rule changes at this time. We remain focused on whether fees are fair to investors and will intervene under our existing rules where we are concerned that this is not the case, for example where it is clear that an AFM is charging performance fees in a way that investors could not understand in advance and would not expect (for example well below a stated target).”


 

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