In Policy Statement 19/4, the FCA has set out details of the second set of remedies it is introducing to address issues identified in its 2017 Asset Management Market Study.

The Asset Management Market Study – a brief reminder

The FCA’s study, the final report of which was published in June 2017, identified concerns in three areas, namely:

1. Evidence of sustained, high profits in the sector over a number of years, suggesting a lack of or inadequate competitive pressures;
2. A lack of clarity over fund objectives and fund performance not always being reported against an appropriate benchmark; and
3. Issues with the manner in which the investment consultancy market operates.

Previously published remedies

The FCA proposed a package of remedies to address these concerns and has already published details of its final proposals in respect of the fair treatment of investors in funds and changes to governance arrangements for fund managers. These were set out in PS 18/8, published in April 2018.  Whilst this article focuses on the second set of remedies which the FCA has now confirmed, it is worth summarising the remedies previously put forward, not least because the FCA itself has noted that its remedies need to be viewed holistically if they are to achieve their intended objectives for the industry.  In summary, the FCA’s previously published remedies included:

• The introduction of a “value for money” assessment which fund managers are required to undertake on new and existing funds;
• A requirement for 25% of the Board of fund managers to be made up of independent directors, with a minimum number of two;
• A rule requiring firms to hand back to investors any risk-free profits made from dealing as principal in the units of dual-priced funds (so called “box profits”);
• Changes to the process required when switching investors into different share classes; and
• The creation of a new Prescribed Responsibility under the forthcoming Senior Managers and Certification Regime covering responsibility for an AIFM’s assessment of fair value to investors.

Newly published remedies

The second set of remedies published by the FCA focus on its concerns over fund objectives, performance and benchmarks, and include requirements relating to:

• The manner in which fund objectives and investment policies are described in literature;
• The explanation of why and how benchmarks are used by the fund, and how investors should assess performance of the fund in the absence of a benchmark;
• Consistency of references to benchmarks across fund documentation;
• Presentation of past performance, which must be against the relevant benchmarks that are used as constraints on the construction of the portfolio;
• The calculation of performance fees, which must be done after the deduction of all other fees.

The requirements in respect of benchmarks will come into force on 7 May 2019 for new funds and on 7 August 2019 for existing funds, whilst the rules regarding performance fees will come into force on 7 August 2019.  However, the FCA has stated that it expects fund managers to “take our guidance on fund objectives into consideration when reviewing fund documentation from the date of publication of this policy statement” (4 February 2019).

Our view

The changes being introduced by the FCA are not unexpected and are largely in line with those put forward in CP18/9.  Viewed in isolation, these changes arguably do not appear onerous, primarily requiring impacted firms to focus on the content of their fund literature, together with the manner in which performance fees are calculated (where relevant).

However, it is necessary to consider these changes in a wider context, having regard to the drivers behind and findings of the Asset Management Market Study itself and the previously published remedies aimed at addressing concerns over value for money and governance, together with the changes introduced by MiFID II in respect of customer facing literature (for instance, in respect of disclosure of fees and charges and the definition of “fair, clear and not misleading” in the context of communications to professional investors) and in the area of product governance.

When viewed in this context, it is clear that these changes are part of a strong focus on customer outcomes in the asset management sector and a desire to ensure that firms are focusing on delivering good value products and services to investors, supported by clear and consistent literature aimed at ensuring customers can make fully informed choices about the funds in which they choose to invest.

Further, the Senior Managers and Certification Regime, which comes into force for solo regulated firms from 9 December 2019, is intended to deliver improved standards of conduct and culture and increased accountability within financial services firms, with senior managers being subject to a legal duty of responsibility enabling the FCA to hold them personally to account for failings in areas of the firm for which they were responsible.

Whilst on the face of it, these changes appear to be focused around the content of fund literature, in practice firms will need to think much wider than this, asking themselves questions such as:

• What steps do we take as part of our product design and governance process to ensure new funds are designed around genuine needs, existing funds continue to serve genuine needs and all funds deliver fair value when considering their returns relative to the degree of risk posed to capital?
• Are the benchmarks used to measure performance appropriate in the sense that they present a fair comparison which enables an investor to make an informed choice?
• Are fees and charges models, including performance fees, reasonable and if not, what impact does this have on the ongoing commercial viability of funds?
• Who within the firm’s senior management team will assume responsibility for the ongoing assessment of these and other related questions, and what systems, controls and management information will be required in order to enable that individual to discharge their legal duty of responsibility?

With many firms now starting their SMCR planning in earnest, whilst also potentially dealing with the challenges presented by Brexit, these changes come at a busy time for the industry, and proper planning will be vital if firms are to meet the aggressive timescales for implementation set out by the FCA.

Kemp Little can assist firms in meeting these and other regulatory challenges by:

• Providing advice and guidance on the interpretation and application of the new rules;
• Reviewing project plans and related documentation;
• Reviewing proposed solutions, including revised fund and associated literature;
• Benchmarking against peers and industry best practice; and
• Conducting post-implementation reviews.

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