Portfolio Adviser • Portfolio Adviser February 2019 v2 • On The Money

The message the FCA made loud and clear when it concluded its Asset Management Market Study last April was that it wants the industry to show customers are getting real value. Since then the regulator has gone on to require a ‘package of remedies’ designed to tackle weak price competition (as it sees it), increase transparency and oblige firms to assess whether they deliver value.

One of the most significant remedies proposed by the FCA is the requirement for UK fund managers to make an overall assessment of value from the 30 September 2019. This will culminate in firms publishing the results of their own assessments.

This assessment must provide sufficient detail to justify all fees and charges and will be performed at share-class level for each fund. The findings will have to be made available to the public as part of each fund’s prospectus in an annual statement.

The regulator wants to see greater visibility of competition among asset managers and will continue to challenge any practices where it feels services do not benefit the end consumer.

However, the requirement to deliver value for money presents a number of conundrums. For one thing, what constitutes value remains somewhat subjective.

Under the incoming Senior Managers and Certification Regime, the duty for ensuring the assessment is delivered lies with the chair of the firm’s governing body, and it will fall to this board to ensure it is satisfied with its own value criteria.

The challenge for firms resides in building and implementing a new framework from scratch, one they can be confident meets the FCA’s expectations, particularly when the regulator starts to form its own views on the quality of firms’ emerging methodologies.

In measuring and delivering value for money firms have myriad factors to consider, principally relating to costs and charges versus investor returns. Fund performance will inevitably come under even greater scrutiny as firms self-evaluate what should be considered good performance over an appropriate timescale.

Firms must also assess how their fees compare with the market rate. They must consider how much they charge for management services in relation to peers running institutional mandates of comparable size, or with similar investment objectives.

They must review the methodology for calculating fund charges and ask if it is appropriate for unitholders to be in share classes with higher charges than those for other similar share classes of the same fund.

Finally, they must demonstrate, if possible, the savings and benefits that can be achieved from economies of scale in larger funds, and whether these can be passed on to investors.

The concept of value for money is broader than costs and charges alone, however. Downward pressure on fees has forced asset managers to compete on other less tangible aspects. Investors, and the regulator, will increasingly judge asset managers on the range and quality of their services. Client demands are changing, and a personalised, targeted and often digitised service is now expected rather than a ‘nice to have’.

The breadth and depth of data analysis this assessment requires presents fund managers with a substantial challenge. Firms will need to gather and benchmark large amounts of data and must be able to do all of this in a timely and repeatable manner.

They must also strike the right balance between a credible assessment, in line with their peers, and a solution proportionate to the scale of their business.

There is an opportunity for asset managers to use the ‘value for money’ assessment to make decisions that, if implemented, could deliver better experiences for the end customer.

While there is a risk that the nuances of their services are diminished through cross-firm comparison and benchmarking, firms can take the opportunity to showcase their performance and services and use this as a springboard for differentiation.

The £9trn question is whether this assessment will work in the way the FCA intends.

The success of the package of remedies depends heavily on asset managers achieving a blend of good governance and effective disclosure, and on investors taking advantage of the new information and tools available.

The FCA will be watching with interest to see if consumers make informed choices based on useful disclosures and if the marketplace enables them to judge providers freely and fairly.

SEP ’19

DEC ’19

BIOGRAPHY

Andrew Glessing has more than 25 years’ experience in financial services and compliance. After working in the asset management and life and pensions sectors, he moved to the FSA to focus on industry-wide thematic projects and the supervision of asset managers, wealth managers, platforms and distributors. He joined Alpha in 2016 as head of the compliance ate and regulatory practice, responsible for helping clients meet regulatory requirements.