Authorised fund managers’ assessments of fund value 2023

The Financial Conduct Authority, FCA, recently published the findings from its review of the assessments of value (AoV) of authorized fund managers (AFMs) for the funds they manage. This assessment is a substantial requirement of fund managers under the Collective Investment Schemes Sourcebook (COLL) and includes at the minimum the yearly review of their funds in terms of fees, quality of investment decisions, and fund performance to ensure good outcomes to investors. The review results – along with possible steps fund managers intend to take to improve the outcomes for investors – must also be disclosed to investors on an annual basis – at the least.
This latest review took place between November 2022 and March 2023 and involved 14 AFMs. It was a follow-up on the FCA’s review performed in 2020/2021 which revealed some major deficiencies in the assessment. The key findings of this latest review are presented below.
(1) Overall findings:
The assessments have significantly improved since 2020/2021. In fact, many AFMs have successfully incorporated value assessment into their product development and fund governance procedures resulting in reduced fees and expenses and thus ultimate savings by investors. However, some issues still remain, particularly as regards the work of independent directors and the conclusions drawn from the assessments.
(2) Gap analysis to the 2020/2021 findings:
This recent review revealed that while most firms had indeed conducted gap analyses in response to the July 2021 findings, there were instances of critical oversights, misjudgements regarding the relevance of feedback, and a lack of critical examination of the analysis process by key decision-makers. These factors contributed to a weaker AoV process being in place during the FCA’s review in some cases.
(3) Use of improved data and process findings in assessment decisions:
Despite the availability of better data and analysis, some firms chose to disregard or provide unreasonable explanations for these improved inputs. This led to situations where current fee levels were deemed justifiable, even though the improved information raised substantial concerns in this regard. Additionally, certain AFM Boards noted that fund fees were determined by more senior committees or boards within their global groups, with AFMs having only a restricted influence in this matter. In this context, the FCA emphasizes that it is essential to reiterate to AFM Boards and their Senior Management Function holders (SMFs) that, irrespective of inputs from their respective groups or external parties, they bear sole responsibility, as stipulated by COLL6.6.20R, for conducting AoVs and reaching conclusions regarding the justification of fees.
(4) Assessment of fund performance:
Generally speaking, AFMs exhibited varying approaches to fund performance assessment, with some adopting effective practices while others displayed deficiencies in their methodologies and criteria used to determine fund performance. Effective practices involved the setting of clear fund objectives and performance thresholds aligned with investment strategies. Conversely, some firms tended to prioritize easily attainable capital growth targets, disregarding active management and market risk reduction techniques. Similar findings were made as regards the application of performance metrics: in fact, some AFMs set out disproportionately high thresholds for poor performance, making it difficult for funds to receive a poor rating. Furthermore, some firms lack a clear framework for evaluating performance and struggle to explain their assessment methods.
(5) Investment fund costs:
While most firms have improved their assessment methodology on investment fund costs to ensure that the fees charged by the AFM are justified based on the actual costs incurred in operating a fund, some firms failed to conduct activity-based cost allocation at fund and share class levels, making it difficult to determine the source of costs. Furthermore, the FCA observed that cost savings reached by economies of scale are sometimes not passed on to investors and too often, AFMs compared their fees to those of competitors to determine the adequacy of such.
(6) Reporting on the assessment:
In summary, the FCA observed notable improvements in the quality of reporting by most firms. Specifically, the FCA found that the reports on the assessment of value now incorporate disclosures concerning the assessment conclusions and – whenever applicable – contained a description of actions aimed at addressing instances of poor value of investment funds. However, most AFMs complained about the costs associated with the production of the reports, which can be nearly eliminated – so the regulator – if the reports are incorporated in the annual fund reports.
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To conclude the FCA notes that fund managers shall take the findings from the review, the summary of which is far from complete, into account for their upcoming AoVs. The regulator will continue to monitor the assessments and take action wherever necessary to ensure good outcomes for investors. In this context, the FCA also reminds of the new Consumer Duty and the obligations of fund managers in this context.