FCA Assessment of Value review signifies regulator’s intent to drive down fees

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The FCA’s review into Assessment of Value Reporting (AoV) will make it significantly more difficult for fund groups to justify high fees during periods of underperformance.

Having launched the AoV reporting requirement more than a year ago, the FCA has found fund managers falling short on assessing the value of their funds and Mikkel Bates, Regulations Manager at FE fundinfo believes the initial review could be seen as an attempt to reduce fees for investors.
Bates says: “The FCA has said in the past that it is not a price regulator, but that it favoured greater transparency as the tool to drive competition and hence price pressure. This review shows that it has moved beyond that stance, as it seems that transparency alongside self-justification of fees has little impact on competition. So, it is out to shake up the old order and drive charges down to something nearer what it costs groups to manage funds.

“Despite a need to assess performance for each share class net of fees, the FCA found some groups used gross returns or only assessed the cheapest share class, but the strongest criticism was aimed at active managers of funds whose objective is as vague as “capital growth”. Achieving a positive return in rising markets, while underperforming the comparator benchmark, was not deemed a justification for higher fees than passive funds.”
Beyond the initial findings surrounding fund groups’ justifications of their fees, the review also raised some concerns about the role of some independent non-executive directors (iNEDs) and their attitude towards AoV reporting.
Bates adds: “While the quality, knowledge and engagement of some iNEDs was acknowledged, the FCA was not impressed by those who could not demonstrate knowledge of the AoV requirements, didn’t show that they represented the interests of investors, or even came across as ‘antagonistic towards the aims of the AoV process’.”
For fund groups, one of the main complaints raised concerning AoV reporting was that the FCA provided them with little to no guidance on how they should prepare their reports and this perceived lack of clarity was duly acknowledged by the review.
Bates says: “With little in the way of prescription and a lot to consider for the first set of assessments – particularly for those with a fund year end that put them near the front of the queue, with little or no precedent – it’s no surprise the FCA found cause for complaint, but it is a little surprising that so many criticisms are for failures to meet the requirements that have been clearly set out. It’s no wonder the report card says ‘could do better’. Nonetheless, the review suggested groups should look at others’ reports for examples of good practice and make changes to their own where necessary.
“That said, the FCA also pointed out that the audience may not always be the end investor, but other stakeholders who make their own assessments of fund value for investors. Anecdotally, the main readers of AoV reports have been competitors, journalists and campaigners against the fees charged by active funds. This review will give all of them something to add to their armoury.
“Another review will be undertaken in a year to 18 months and the FCA expects firms to have taken on board its comments, with the threat of “other regulatory tools” if they don’t. Quite what this will entail is open to speculation.”