Value Assessments – the FCA’s findings

The FCA has published its findings following a review carried out on the value assessments of 18 authorised fund managers (AFMs). It has concluded that most of the AFMs reviewed failed to meet the FCA's standards in carrying out the review and wants to see "more rigour" from AFMs when assessing value in its funds.

What next?

The FCA expects all AFMs to assess their value assessment processes in light of these findings and make any changes necessary. The FCA has indicated that it will carry out a further review of AFMs in 12/18 months (equating to July 2022 / January 2023) and may consider "other" regulatory tools at that time. This could, for example, include the FCA commissioning a s 166 skilled person report or considering enforcement action where appropriate. We would also note, from a SMCR perspective, that compliance with the value assessment and independent director rules is a prescribed responsibility (za) that will normally sit with the Chair of the AFM board.

AFMs will need to consider the FCA’s findings in detail and consider both the value assessment reports published as well as the framework in place for carrying out the annual assessment (including quality of data and metrics, defined procedures, involvement of independent directors and challenging assumptions). The FCA will want to see evidence that all AFMs have reviewed their procedures in light of the findings and made the necessary amendments. We anticipate that this will require some AFMs to make significant changes to their procedures.

Background

As one of the FCA's remedies under its Asset Management Market Study (AMMS), AFMs have been required to carry out an annual assessment of the overall value offered by their funds 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. The rules came into force in September 2019 and all AFMs have now published at least one annual value assessment.

What concerns did the FCA raise?

Following its review the FCA identified a number of issues, including the following:

Testing assumptions. Too many AFMs are making assumptions that could not be justified, undermining the credibility of the value assessments. The core principle behind the value assessment requirement is that AFMs are agents of the investors in the funds and therefore need to be accountable to the investors on how they deliver value. This requires AFM boards (and in particular the independent directors) to employ a level of objectivity to the value assessment and its conclusions and challenge any assumptions that may have been made in the process. It would be important to ensure that such challenge by the board is documented.

Performance. AFMs are not considering what the fund should deliver in terms of performance given the investment policy, strategy and fees of the fund. As a reminder the AMMS identified a number of closet tracker funds (those charging active fees for what was essentially a passive product). A separate remedy under the AMMS was a requirement for AFMs to explain how investors should assess the performance of a fund (including through use of benchmarks where relevant). As part of the value assessment, AFMs should consider fund performance (both past and reasonably expected future performance) over a timescale appropriate to the fund's investment objective, policy and strategy against the fees it charges and the investment policy/strategy, taking into account how the AFM has told investors to assess the fund's performance.

Portfolio management and distribution fees: AFMs are looking for savings in administrative charges which have marginal impact on investors but not challenging the portfolio management or distribution fees charged to the fund, a reduction in which could have a greater impact for investors. The FCA expects the AFM to challenge all fees charged to the fund both against comparable market rates and for comparable services provided by the AFM or its associates. AFMs are also expected to identify whether they are able to achieve economies of scale through management of the fund and, if so, whether and how such economies of scale can be passed back to investors.

Poor processes: The FCA found some firms with poorly designed processes leading to incomplete assessments. This included value assessments which did not meet the minimum criteria set out in COLL 6.6. While there is no prescribed format or process for the value assessments there is a set of minimum criteria that need to be considered at share class level. AFMs should ensure that their value assessments are meeting these criteria at a minimum and that the process they have in place supports this.

Independent directors: An AFM is required to have a minimum of two independent members on the governing body. The role of the independent directors is to ensure the balance between interests of AFM shareholders and investors is struck appropriately and that what is determined to be in the best interests of investors is subject to scrutiny and challenge. The FCA found that independent directors are not always providing robust challenge at board level and, in some cases, demonstrate a lack of understanding of fund rules. AFMs are required to ensure that the independent directors have sufficient expertise and experience to be able to make judgments on whether the AFM is managing each fund in the best interests of investors. AFMs should also confirm that the scrutiny and challenge of the independent directors is not only happening but can also be evidenced in board/committee meeting minutes.