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Simon Collins: FCA tightens grip on value for money

It is likely the increased regulatory scrutiny on fund managers’ value could filter down to advice firms in the future

In my last article, I considered the influence a non-executive director could have in challenging an advice firm’s business model in light of the pension transfer issues.

Now, in its asset management market study final policy issued earlier this month, the FCA has outlined a requirement for fund managers to have independent non-executive directors on their boards.

The regulator used the report to reiterate its view that fund managers do not robustly consider the value they offer to investors and that this leads to investor harm.

It concluded they must be held accountable on this and demonstrate their products’ value on an annual basis. That said, it did concede the rules should not focus only on cost but on the fund’s entire value proposition. It will be crucial for firms to consider the process by which they implement this change and the factors relevant to each fund they manage, which may differ between schemes or asset classes.

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Fund managers should also consider that the factors applied may differ year on year as the fund changes. The FCA has suggested an implementation date of 30 September 2019.

So what part will the independent directors play in this? 

First, let’s look at the rules. The proposal to introduce non-executive directors was generally well supported by the industry, despite some concerns it might be an overly burdensome requirement for start-up or smaller fund managers.

On that point, the FCA has made it clear the benefits of independent scrutiny should be enjoyed by all investors, no matter the size of the business they are investing with. It is also of the view the measure of independence in the formative years of a business is crucial in shaping both strategy and culture.

Fund managers must ensure that at least one quarter of members of the governing body are independent. If the body comprises eight members or fewer, at least two must be independent.

The guidance and requirements on independence are detailed but are set out in the final report. What is clear is that the independent directors should provide input and challenge to the value for money assessment.

FCA: IFAs can sit on fund group boards as independent directors

The prescribed responsibility for all of this is to be implemented as part of the extension of the Senior Managers and Certification Regime. 

Specifically, a senior manager (usually the chair of the board) must take reasonable steps to ensure the firm complies with its obligations to carry out an assessment of overall value, its duty to recruit independent directors and its duty to act in the best interests of fund investors.

The value assessment will require consideration of economies of scale, charges and other payments, the quality of services and the different share classes available to investors.

The FCA has clarified that it will remain up to firms to decide whether to appoint an independent chair.

The FCA’s aim is to strengthen the duty of authorised fund managers to act as “good agents” for their underlying investors. This terminology echoes the comments of the Upper Tribunal in the Arch Financial Products case.

The “good agent” principle is more a regulatory than legal concept and the boundary between legal and regulatory duties here remains to be fully worked out.

The impact of these developments are wide ranging for the asset management industry, particularly in relation to governance and assessment of overall value delivered, which are new areas for fund managers.

New policies, procedures and projects will need to be put in place as soon as possible.

It is worth noting that, while it is asset managers that will need to address the immediate impact of the value for money duty, the FCA’s final rules suggests these obligations may well be extended to other types of firm in the future.

Simon Collins is managing director, regulatory, at Eversheds Sutherland

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. Value for money is very much in then eye of the beholder and of course is sometimes difficult to quantifying.

    What concerns me is the race for the bottom, where will it end?

    I think I know where.

    There can be no other industry that sees a regulator enforce what amount can be charged by fund managers and others while at the same time ignoring its own mantra regarding the direct and indirect cost of regulation.

    Whatever happened to let the ‘markets decide’?

    It seems that there will be a regulatory offence of charging what you can achieve for a product or service, that a client is content with, that you really should not and that fund managers and advisers should be ‘non profit’ organisations or pro bono only.

    Grrrr

  2. Let us firstly differentiate between fund mangers and advisers. Fund manager sell a product, advisers sell a service. Fund managers don’t have to agree with the client upfront a fee for buying their product, advisers do.
    The point I am trying to make her is that Mr Collins is making a huge leap and employingscar tactics by insinuating that advisers fees are the next thing to be targeted by the FCA.
    Capping fees seems rather self defeating from the regulators perspective, as a firms FCA fees are calculated as a percentage of turnover. If a firm is forced to cut it’s fees, its turnover will reduce and the FCA will receive lower fees.
    The FCA have always said they do not involve themselves in the commerciality of its regulated firms and I agree with that, I also agree that the FCA has a duty to ensure ALL regulated firms are completely transparent in disclosing the true costs of that product or service. This is the real issue, not that one firm, in the view of the regulator, charges too much, that is the decision of the investor, otherwise we would all be driving around in a Dacia Duster.

  3. I would have thought – in all logic – that value for money can only be judged by the purchaser and not by any external body who will doubtless be unaware of all constituent parts of the product or advice purchased.

    Many might think that a Ferrari is great value at around £200k will other may have the same view of a Dacia at around £8k.

    As far as the regulatory bureaucrats are concerned it would appear that the don’t have enough work ensuring that the cowboys and scammers are properly curtailed. As the saying goes: “Satan finds some mischief still for idle hands to do”.

  4. Ultimately this is a philosophical question.

    There is price setting and there is a completely free market. Where does the regulator want to be on that scale?

    One thing we do know is that the idea of controlling or influencing prices downwards through transparency has fallen flat on it’s face every time it’s been tried. For no other reason than human behaviour (not know to deviate much). The definition of stupidity is continuing to do the same thing and expecting a different result.

    However, given the apparent obsession with costs (sometimes dressed up as ‘value’) there will either be another transparency effort or a move to some form of price control. If history repeats itself IFAs will come out better off so perhaps we shouldn’t worry ourselves too much…

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