A number of fund managers have not been able to appropriately justify the fee they charge against the value provided to their investors, the latest Financial Conduct Authority (FCA) Assessment of Value report, published today, has found.
Since 2020, fund managers have been asked to carry out an annual assessment of value and report the findings to their investors, together with an explanation of what action the firm has taken, or will take, if they find investors’ fees are not justified.
Many had failed to comply in 2021, when the regulator found shortcomings in their reports. Although the understating of the requirements has improved since then, there’s still more work to be done, said the FCA, rebuking firms for overlooking the key findings from 2021 or taking actions that did not address them.
“Many firms have now fully integrated considerations on assessment of value into their product development and fund governance processes. This has driven changes in fees and charges, resulting in savings of costs to consumers amounting to millions of pounds,” the report read.
Some assessments have led many firms to take remedial action when poor value was identified, including some reductions in fund fees by a few basis points. Additional savings for investors have also come from firms deciding to move them to 'clean' share classes with no trail commission.
But despite these positive outcomes, the regulator also identified some sore points, with some outliers remaining where action needs to be taken.
For example, while firms generally had a better understanding for the need to justify fees, most remedial action did not involve cutting funds’ charges.
“Where fees were cut, the share class fee reductions were almost always driven by adverse comparable market rates findings rather than other considerations,” said the FCA.
“This suggests that fund managers continue to 'cluster' around price points identified as a market failure. Some firms cited erroneous operational or regulatory barriers to reducing fees.”
Outlier firms were typically those that were not able to support their assumptions and assessments with sufficient evidence or were not able to substantiate claims – with a few wrongly judging that FCA feedback wasn’t directed at them.
This is particularly relevant in relation to the new Consumer Duty regulation, for which firms are expected to deliver fair value for retail consumers, noted Camille Blackburn, director of wholesale buy-side at the FCA.
“Authorised fund manager boards and senior managers are responsible for ensuring value assessments are carried out properly and any issues found are resolved quickly,” she said.
“It is vital that firms make sure they are not solely focused on a fund’s profitability over value for money for investors. The Consumer Duty, which is now in place, further supports our expectations in this area.”
Jonathan Lipkin, director of policy, strategy & innovation at the Investment Association, added: “We welcome today's findings from the FCA that many firms have now fully integrated considerations on assessment of value into their product development and fund governance processes, in line with the Consumer Duty.
“We note that there are still some areas for improvement and will continue to work with the regulator and our members to ensure investment funds deliver good outcomes for investors.”