FCA multi-firm review findings on AFMs' assessments of funds' value

On 10 August 2023, the FCA published a webpage setting out the findings of its most recent multi-firm review of processes Authorised Fund Managers ("AFMs") use for assessments of value ('AoVs') for the funds they operate. This was a follow-up to a previous review, the findings of which were published in July 2021 (the 'July 2021 findings').

For more information about the July 2021 findings, see our Insights Article here.

What's the background?

The Collective Investment Schemes sourcebook (COLL) rules require AFMs to carry out an AoV at least annually, report publicly on their conclusions and appoint independent directors to AFM Boards. These rules came into force in September 2019 following the FCA's Asset Management Market Study Final Report (AMMS) in June 2017.

The COLL rules require AFMs to assess whether each fund's fees and charges ('fees') are justified by the value provided to fund investors, measured against at least seven minimum considerations ('considerations') set out in COLL 6.6.20.

The FCA conducted an initial review in 2020/21 to see how well AFMs had implemented the rules and published the July 2021 findings, along with a statement expressing concern that, of the AFMs reviewed, most had not implemented arrangements meeting the FCA's standards.

For this latest review the FCA used a different sample of AFMs to see how they had implemented the rules and responded to the July 2021 findings.  It reviewed relevant information and held interviews to understand firm processes, the inputs they used and their AoV governance. The FCA used case studies to explore how they assessed value against the minimum considerations.

What did the FCA find?

The FCA has found that many AFMs have a better understanding of the rules and have now fully integrated considerations on AoV into their product development and fund governance processes.

It stated that this greater focus has also driven changes in fees and charges, resulting in cost savings to consumers. The FCA warns, however, that action is required in some areas, in particular in the context of the FCA's Consumer Duty and its expectation that AFMs are not solely focused on fund profitability over value for money for investors.

Headline findings

Identified improvements

• AFMs are making fewer assumptions that they cannot evidence as reasonable.  A key finding in the July 2021 review was that AFM Boards were reaching conclusions based on assumptions.  AFM Boards need to be wary of making assumptions and need to be able to support any assumptions and assessments with sufficient evidence and substantiate any claims made.

• AFMs are taking remedial action when poor value is identified, including some reduction in fund fees.

• AFMs are presenting higher quality management information (MI) to the AFM Board (although the FCA did state that some AFM Boards (or their committees) were reaching conclusions in the AoV process that did not take account of this improved MI)

Other findings

• Fund charges are continuing to cluster around price points.  The FCA believe this is evidenced by the fact that most AFMs that did cut fees were driven by adverse comparable market rates rather than any other consideration as to whether the fees are justified in the context of the value provided to investors.  "Clustering" was identified by the FCA under the AMMS as a market failure and was a key reason for the introduction of the AoV rules.  

• AFMs were erroneously citing regulatory or operational barriers to reducing fees.

• The FCA found that tensions between a fund's profitability for an AFM and assessing the fund's value for money for investors appeared to be influencing AoV decision making and outcomes.  The AFM Board needs to identify and manage this inherent conflict.

Good and poor practice for six of the seven considerations (the FCA had no specific comments on the “Classes of units” consideration) and other relevant findings identified by the FCA is set out in the document linked below.

What's next?

The FCA pointed out that for authorised funds the AoV rules and guidance act in place of the price and value outcome rules of the Consumer Duty that came into force on 31 July 2023. However, as the Consumer Duty is broader than just the price and value outcome, AFMs should still consider how they meet all other aspects of the Consumer Duty.

Each AFM is expected to consider these recent FCA findings and assess the quality of analysis, decision-making and governance of its AoV processes to ensure compliance with COLL 6.6.20R and COLL 8.5.17R. Where necessary, the FCA expects AFMs to implement appropriate changes.