It is hard to read the FCA’s verdict on the first round of Value Assessments from fund managers without getting very angry. The list of crimes against the consumer is long and unremitting.
While clearly there were some Assessments that were structured to help consumers understand whether they were getting value from their fund manager, for the most part, the funds industry has let itself down once again.
You can read the list of atrocities here;- Authorised fund managers’ assessments of their funds’ value | FCA
Sometimes the FCA uncover what appears blatant profiteering, sadly this includes unjustified fees for ESG services
‘A firm referenced an ESG service that had been integrated across a wide range of funds, but it couldn’t explain to us why this justified the quantum of the additional fees it charged for these funds versus its non-ESG range.’
There are and should be extra costs for properly integrating ESG, but the point of the FCA’s work is to establish the going rate and ensure that it is not extortionate. It is good that the FCA are picking up on this
The review comes after the first round of value assessments, published last year, raised eyebrows after several firms admitted many of their funds failed to offer value.
This prompted many – including Schroders, BNY Mellon, Jupiter and Hargreaves Lansdown – to cut fees across certain funds and asset classes. It also brought about a wave of fund closures and mergers and, in some cases, manager changes.
Value assessment rules were the result of a scathing 2016 industry report by the watchdog, which found weak price competition was detrimental to investment returns. But asset managers and fund administrators argue the project is still in its infancy and that a lack of defined guidelines by the FCA means companies have had to interpret the requirements themselves.
I spoke last night with SJP’s CIO Rob Gardner who had had virtually no feedback on last year’s value assessment. The SJP VAS21 is due out next week and I will be reporting on it. SJP administer drawdown for some 300,000 individuals, the importance of its fund assessment to the mass affluent is huge.
It seems that SJP were not among the 17 managers analysed.
A good start stalled
In its review, the FCA said the assessment of ‘comparable market rates’ on fund charges had led some asset managers to cut fees. However, it found
‘instances of higher-charging unit classes, costing investors significantly more than the peer group median’ had been excluded from firms’ assessments’.
‘The potential for further fee cuts was, therefore, overlooked,’
Dodging difficult questions
The FCA also fired a broadside at independent fund directors, saying many ‘did not have a good understanding of the value assessment rules or of the role expected of them’ and failed to challenge company bosses on whether each fund delivered value.
The regulator said a ‘small number’ of independent directors seemed antagonistic towards the aims of the assessment of value process, raising questions over whether they saw safeguarding investors’ interests as part of their remit.
‘We expect independent directors to ask the difficult questions we asked in this review; in practice we did not observe enough independent directors doing this,’
Elsewhere, the regulator rejected concerns that retail investors were ‘overwhelmed by over-lengthy reporting’, saying the documents should merely be ‘carefully constructed’.
Speaking to Money Marketing , Boring Money’s Holly Mackay had plenty to say.
She called the FCA’s feedback is a “huge blow” for the industry adding
“The regulator’s concerns seem largely to focus on fees and charges, although they do call out performance reporting from active managers where meeting a generic fund objective of ‘capital growth’ in rising markets is not a sufficient achievement to cite value delivery.
“Value managers will also sit up and take note that the FCA took a seemingly dim view of citing investment style as a long-term ‘get out of jail free’ card for relative underperformance.”
Mackay also warned that evaluation of costs and charges will need to be re-considered across the board.
“The regulator seems to be frowning on a peer group comparison alone, requiring firms to consider this based on their actual levels of spend and hence margin, rather than relative cost.
“Those who work off an assumed acceptable profit margin percentage have also been spanked – without robust justification of where these ‘acceptable’ profit margin levels came from, a firm-wide assumption is not OK.
“As a final note, more headaches too for those running multi-asset or fund-of-funds who have been told that their job in life is to provide better risk-adjusted returns, and so a multi-asset fund holding 75% in shares could usefully compare itself against a fund holding 100% in shares to gauge how much value a fund’s asset allocation is adding. This is a significant change to the status quo.”
Mackay concluded by saying the FCA’s feedback was a “very uncomfortable read” and fundamentally asks fund managers to re-assess how they report objectives and measure value.
Value Assessments are only one of a number of initiatives from the FCA, DWP and TPR to ensure that consumers know what they are buying and what they are paying for its value.
The big problem is consistency in reporting. I have been saying for some time that the fundamentals are the same whether you are saving into a workplace pension or investing into a SIPP, you are paying third parties to manage your money and should expect consistent reporting on both the value received and the money paid.
It is now well over a year since the FCA consulted on a common definition of value for money and we are yet to hear the response. The ball is in the FCA’s court to use that consultation to create a common framework.
I’m with Moira O’Neill, head of personal finance at Interactive Investor, who told Citywire
‘ we’d like to see more guidelines on the reporting of value-for-money statements. They are frustratingly difficult for ordinary investors to find and require journalist-like investigative skills. It need not be so difficult,’