Assessment of Value reports: Round one

Almost all managers have now published their first assessment of value (AoV) reports under FCA rules. Just over one year on from the introduction of those rules, we consider how the FCA and others have reacted to the first round of assessments and the tension in what is expected of managers where the exercise prompts remedial action.

What are assessments of value?

Under the relevant COLL rules, which were introduced in September 2019 and were borne out of the FCA's Asset Management Market Study, managers are now required to carry out an annual assessment of the overall value that funds they manage offer to investors. The rules set out seven criteria against which value must be assessed, those are: quality of service, performance, costs, economies of scale, comparable market rates, comparable services and share classes.

What has the FCA said about the AoVs?

The FCA has remained relatively tight-lipped to date on what it thinks of the first round of AoVs. There appear to be (well-sourced) rumours that it is currently reviewing a cross section of managers to identify good and bad practices with a focus on the governance processes around the assessments rather than the assessments themselves.

Where the FCA has spoken about the assessments, its messaging has been consistent: the assessments should be about producing better outcomes for investors, rather than an exercise in "strict rule compliance". In a recent speech (September 2020) delivered to the Investment Association, Marc Teasdale (Director of Wholesale Supervision - Supervision Investment, Wholesale & Specialists Division at the FCA) said:

"the value assessment is the centre-piece of the Market Study remedies, and our profound hope is that the industry will see this as an exercise in Purpose, rather than simply regulatory compliance... Where there is mismatch, we expect firms to take action to improve the proposition they are offering to their customers."

The focus on outcomes is also consistent with how the FCA has said that it intends to think about regulation in a post-Brexit world.

The FCA's publications around the introduction of the AoVs suggest certain intended outcomes for investors. These include: (i) enabling investors to make informed decisions about the funds in which they invest by comparing the value offered by different funds; and (ii) as referred to above, manager action to improve the proposition they offer to investors, where they identify that they are offering poor value.

The first of these concerns the content of the AoVs. As expected, managers have adopted different approaches to the exercise. This is a product of the FCA's decision to not prescribe a required form for the AoVs and simply to specify the minimum criteria against which value must be assessed.

This has resulted in a first suite of AoVs which range in how they present information.  It seems that managers are grappling with the appropriate level of detail to be reflected in their AoVs. On the one hand they want to show the amount of analysis and work involved in producing the assessments, but on the other hand they want to produce something that investors will actually read.

There was always going to be a good degree in divergence of approach in circumstances where managers had no prescribed template to work from and it seems inevitable that future AoVs will evolve as managers look across the industry to see the approaches adopted by other managers and take the opportunity to improve and develop their own AoV processes and reports. It is also likely that as approaches to AoV progress, the reports will prove a more valuable tool for both investors and managers in investing and attracting capital respectively.

The second intended outcome concerns remediation action taken by managers. Managers have taken different types of action where they have identified, through their AoVs, that a fund does not offer value to investors. In some cases, managers have closed funds entirely, in other instances managers have moved investors into cheaper share classes or reduced fees for existing share classes.

How have remedial actions been received?

Actions taken by managers have in some cases prompted questions as to why changes were not made earlier.  This in turn has led to high level calculations of potential past savings by industry and national media.  These calculations echo what we have seen, and continue to see, in relation to another value-related issue, closet tracking, which we have covered extensively in previous articles.

The criticism managers face for their remedial actions highlights a tension in what is now expected of them. Where managers seek to achieve better outcomes for investors through remedial action, they risk scrutiny from the media and the claimant bar (among others) who will seek to interpret such actions as an admission of historic liability.

The position adopted by the media and the claimant bar is overly simplistic.

First there appears to be a lack of appreciation that the new AoV rules were introduced with the express purpose of raising the bar for managers in assessing value their funds offer. This is evidenced in the FCA's policy paper (PS18/08), which introduced the new rules, in which it said: "In our view, as part of fulfilling this [best interests] duty, AFMs should consider whether charges taken from the fund are justified in the context of the overall service and value they provide through that fund" but conceded the need to "strengthen and clarify" that the duty covered that aspect. It did this through the introduction of the COLL rules relating to the AoVs, including COLL 6.6.23 which states that failure to take sufficient steps to address any instance where a fund's charges are not justified in the context of the overall value delivered to investors may be relied on as tending to establish contravention of the best interests duty.

Second, as noted above, remedial action is the exact type of outcome contemplated by the FCA under the new regime. In that sense, the regime appears to be less about identifying historic activity that may not meet the new standards and more about ensuring that the new standards are met going forwards.