The FCA’s policy statement following the Asset Management Market Study: impact on fund managers

We assess the impact the Financial Conduct Authority’s policy statement, which sets out the second set of remedies for the funds industry following an industry consultation on its Asset Management Market Study, has on fund managers.

FCA Asset Management Market Study: PS 19/4 and the FCA’s final rules on UK authorised fund objectives

The Financial Conduct Authority (FCA) published its policy statement, Asset Management Market Study - further remedies, (PS 19/4) on Monday of this week (the Policy Statement).

The Policy Statement has been eagerly anticipated by the industry and is the FCA’s response to CP 18/9, in which the FCA proposed a number of measures designed to improve the quality, comparability and robustness of the information available to investors.

The rules and guidance set out in the Policy Statement apply to FCA authorised fund managers in respect of disclosures made in the prospectus and related promotional material for their FCA authorised funds. Technically there is no impact therefore on the prospectus or promotional material used in relation to (for example) Irish or Luxembourg UCITS sold into the UK. It remains to be seen whether there are moves to extend their application in practice beyond FCA authorised funds.

The Policy Statement is intended to complement the FCA’s first set of remedies contained in PS 18/8, in which the FCA set out final rules designed to improve fund governance for authorised funds and outcomes for investors. Of most significance, PS 18/8 set out the rules required to implement the FCA’s ‘Value for Money’ and ‘Independent Directors’ proposals.

For an assessment of how ‘Value for Money’ will impact fund managers, see our elexica article, Asset Management Market Study: a change of approach from the FCA to the assessment of “value for money”.

For a detailed summary on the FCA’s Asset Management Market Study Final Report, see our elexica article, The FCA’s Asset Management Market Study Final Report.

For a summary of the FCA’s earlier policy statement (PS 18/8) and clients’ frequent asked questions, see our elexica article, FCA Asset Management Market Study: what next?.

For a summary of the FCA’s and ESMA’s increased interest in closet tracking, see our elexica article, An update on closet tracking.

General observations

The FCA is proceeding with the proposals it set out in CP 18/9, subject only to some minor drafting amendments and points of clarification.

Whilst the FCA explains that most respondents to the consultation supported its measures, the Policy Statement acknowledges certain concerns raised by the industry in terms of the approach proposed.

However, it may come as a relief to many that the FCA has amended its final guidance to clarify its expectations around the disclosure of investment strategies and has confirmed that it would not expect, as previously proposed in the CP 18/9, either the KIID/KID or the prospectus to provide a snap-shot of the strategy pursued by the fund at any single point in time. Instead, the KID/KIID and prospectus need only make clear the flexible nature of the strategy pursued by the fund.

On the other hand, the FCA has stood fast on its proposals in relation to fund benchmarks, dismissing a number of concerns raised by the industry. For funds not managed with reference to a benchmark, these included concerns around choosing appropriate comparators for investors to use, as well as the challenge that the FCA’s proposals would have the unintended consequence of forcing the disclosure of benchmarks for funds for which this might not be appropriate.

Please see our further commentary below on the final rules.

Impact on fund objectives

The Policy Statement contains new non-Handbook guidance, which is intended to assist fund managers in describing funds objectives in a clear and helpful way. The guidance is therefore intended to supplement the FCA’s existing rules on fund objectives and policies, which the FCA consider to be adequate in their current form.

The FCA’s hope is that this will result in better informed consumers making decisions to invest in funds that are more suited to their individual needs and expectations, including non-financial objectives.

Whilst CP 18/9 contained examples of poor practice, the FCA declined to publish either examples of good and bad practice or a glossary of consumer-friendly terms in its guidance.

Fund benchmarks

Use of fund benchmarks

Perhaps the most significant of the FCA’s proposals in CP 18/9 concerned the use of benchmarks in relation to authorised funds. As summarised in the Policy Statement, the FCA proposed to: 

  • make new rules requiring authorised fund managers to explain why they use particular benchmarks or, if they do not use benchmarks, to explain how investors should assess the performance of the fund
  • require that, if a fund manager uses benchmarks, the benchmarks must be referenced consistently across the fund’s documents, and
  • require that, whenever the fund manager presents the fund’s past performance, it must do so against each benchmark used as a constraint on portfolio construction or as a performance target.

The FCA is proceeding with these proposals and the 3 categories of benchmark central to them. These are as follows:

  • constraining benchmark: an index or similar factor that fund managers use to limit or constrain how they construct a fund’s portfolio
  • target benchmark: an index or similar factor that is part of a target a fund manager has set for a fund’s performance to match or exceed, which includes anything used for performance fee calculation, and
  • comparator benchmark: an index of similar factor against which a fund manager invites investors to compare a fund’s performance.

The FCA’s new rules in relation to the use of benchmarks are expected to have a significant impact on fund managers. In particular, fund managers should take into account the wide range of documents affected and the challenging timeline for implementation (see the header What should you be doing? below).

Notwithstanding this, it is clear from the Policy Statement that the FCA considers these challenges to be outweighed by the need to ensure that investors are provided with clear and sufficient information to enable them to understand what a fund does, how it does it, and how to evaluate how well it is doing.

In the latter case, the FCA makes clear that it does not agree that where a fund has no benchmark, it should be up to the investor to assess the fund’s performance. Rather, the onus and challenge are now on fund managers to provide the investor with an alternative explanation as to how else to assess their fund’s performance.

Benchmarks and past performance

The new rules will also impact on communications, subject to the FCA’s financial promotions rules.

Going forward, wherever a fund manager presents the fund’s past performance, it will be required to do so against each benchmark used as constraint on portfolio construction or as a performance target (and stated in the fund’s prospectus).
Where a fund uses more than one benchmark, the FCA has clarified that the fund manager must show the fund’s performance against each of the fund’s benchmarks.

Impact on performance fees

On a separate note, the FCA has also taken the opportunity to confirm, by way of new rules, that performance fees must be calculated on the basis of the fund’s performance after all other charges have been deducted.

The new rules are intended to replace the FCA’s current guidance which, whilst indicating that performance fees should be calculated on a “net” basis, did not have the effect of prohibiting outright the calculation of such fees on a “gross” basis.

What should you be doing?

Fund managers should start assessing the impact of the new rules and guidance on their funds as a priority objective. This will mean, among other things, assessing the extent and manner in which existing funds use benchmarks as part of their objectives and policies.

Key dates

The key implementation dates provided for by the FCA’s transitional provisions are as follows:

  • 7 May 2019 - new Handbook rules and guidance in relation to benchmarks come into force for new funds (ie for funds authorised on or after 7 May 2019)
  • 7 August 2019 - new Handbook rules and guidance in relation to benchmarks come into force for existing funds (ie for funds authorised before 7 May 2019); and
  • 7 August 2019 - FCA rules on performance fees come into force.
Immediate impact for funds

Fund managers should also take note that the FCA has confirmed its expectation that fund managers should follow the FCA’s guidance on fund objectives “when reviewing fund documentation from the date of publication”. The Policy Statement therefore has immediate impact on new funds being launched going forwards.

Next steps

Look out for our detailed analysis on how the Policy Statement impacts disclosures in fund prospectuses and other documents in the coming weeks. 

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.