The Financial Conduct Authority (‘FCA’) has followed up its Asset Management Market Study with final rules which will impact the way Authorised Fund Managers (AFMs) who manage collective investment schemes run themselves. Key changes include board composition and duties, as well as reporting on value which will impact how firms operate.
This follows the FCA’s assessment of weak competition in the investment funds sector, and the relative inability of less sophisticated investors to find better value products. Their response is to strengthen the duty on AFMs to act in the best interests of their investors, making it clear that the AFM is the agent of the investor not a disinterested product provider.
The key changes, and the timescales by which they come into force:
AFM Board composition and duties
The FCA identified one reason for investors not receiving value - that AFM boards were generally staffed by executives. From 30 September 2019 all AFM boards will require at least two of its members (and 25% of its total) to be independent directors. Independence means having no financial links with the AFM or its group for at least five years prior to appointment.
The COLL Handbook has been updated to reflect an explicit duty on the AFM board to act in the best interests of investors. When the Senior Managers & Certification Regime comes into force (expected late 2019) for AFM’s, one of their senior managers (the FCA suggests this will usually be the Board chairman) will have a prescribed responsibility to take reasonable steps to ensure the firm meets its obligations. These obligations include, recruiting independent directors, acting in the best interests of investors and meeting the new requirement (see below) to assess value.
Assessing and reporting on value
To reinforce the role of the AFM as agents of the investors in their funds, the COLL Handbook will require the AFM to make an annual assessment of the value they provide. There has been movement since the consultation where value for money of fund costs was the focus, to a broader concept of ‘overall value delivered’ although costs remain a significant element. Specific areas of value that the AFM must assess, as a minimum, and for each sub-fund, are:
- Quality of service provided to investors
- Performance after charges and over an appropriate timescale
- Costs paid by the AFM, in the following ways:
- How the cost of providing the services received relates to the charge made for that service
- Comparable market rates for those services
- Whether economies of scale benefits are being achieved for investors
- Charges - how charges to investors compare with similar services being provided by the AFM and its group, including to comparable institutional mandates
- Unit classes - are there alternative lower cost unit classes available to investors in the same fund with substantially similar rights?
The FCA require the annual assessment of value to be published, either in the fund annual report or in a separate document, although they do not prescribe whether these should be quantitative or qualitative. The first such assessments will be for fund year-ends on or after 30 September 2019, and published within 4 months of the relevant year-end. So the earliest that these assessments will appear publicly will be January 2020, with most reporting in April 2020 for 31 December year-end funds.
As expected the FCA has also banned firms from taking box profits from funds they manage (from 1 April 2019) and eased the rules on how an AFM can move an investor from a higher cost share class to a cheaper one – rather than requiring investor consent, a simple 60 day notification is required (effective immediately).
To find out more about FCA regulations, contact David Morrey