Ill
Active fund management fees are falling. That’s what we learn from reading the FCA’s latest pronouncement on value assessments.
That tells me that the market is competitive , it does not tell me that extra value is being created. The Value Assessments of the fund and asset managers tell us if value is being created. The FCA believe that it is , but more can be done.
I’m pleased that the FCA are monitoring these value assessments and publishing their findings. I’m about to start looking for a 7th year at IGC and GAA reports (thanks Vanguard for sending yours) and I’m not looking forwards to it!
Velvet glove, iron fist
Anyone who knows how the FCA works, will recognise in this introduction , there is trouble ahead
Today’s findings show that many firms have now fully integrated considerations on assessment of value into their product development and fund governance processes. This greater focus has also driven changes in fees and charges, resulting in savings of costs to consumers amounting to millions of pounds.
However, there remain outliers, where action needs to be taken. This is particularly important with the Consumer Duty which came into force on 31 July, where firms are expected to deliver fair value for retail consumers.
The actual report ; summary of findings
Compared with our last review, many firms have a better understanding of the rules and have significantly improved their AoV processes.
Most firms are making fewer assumptions within their analysis that they cannot evidence as reasonable and are presenting higher quality management information to AFM Boards and AoV committees.
Outlier firms in our review were typically firms who were not able to support their assumptions and assessments with sufficient evidence.
We expect firms to be able to substantiate any claims they make.
We found continuing maturity in AoV processes that resulted in many firms taking remedial action when poor value was identified including some reductions in fund fees, typically by a few basis points. Overall, this amounted to savings for fund investors of millions of pounds. We also saw some firms move investors in pre Retail Distribution Review (RDR) share classes to ‘clean’ classes with no trail commission. The savings for these investors were even more significant.
While we found firms had a better understanding for the need to justify fees, most remedial action did not involve cutting funds’ fees. Where fees were cut, the share class fee reductions were almost always driven by adverse comparable market rates findings rather than other considerations.
This suggests that fund managers continue to ‘cluster’ around price points identified in the AMMS as a market failure. Some firms cited erroneous operational or regulatory barriers to reducing fees.
AFM Boards or their committees sometimes reached conclusions that did not take into account improved management information.
Tensions between a fund’s profitability for a firm and assessing the fund’s value for money for investors appear to be influencing AoV decision making and outcomes. This is a conflict for AFM Boards to be aware of and to manage.
Firms that fail to make reasonable decisions to deliver good outcomes will likely fall short of the standards expected to comply with our rules.
This finding is particularly important given the role of an AFM Board is to oversee its funds in the best interests of fund investors. The Board and Senior Management Function (SMF) holders remain accountable for achieving this aim, with independent directors playing an important role in providing independent perspectives, and the director allocated SYSC 24.2 Prescribed Responsibility ZA being accountable for the entity’s compliance with AoV rules.
We will continue to engage with those firms with significant AoV deficiencies, using our regulatory tools as appropriate.
Comment
Value assessments are working and though most aren’t read by many outside the FCA, they are important for fiduciaries such as IGCs , GAA, Trustees and for their advisers.
It is difficult to assess the counterfactual, what savers would have got if Value Assessments weren’t carried out, but we can assume from what we read that value would have been lost
Thes Value Assessments form an essential control against bad behaviour and encourage good behavior. I have worked with SJP on their Value Assessment which I take to be excellent. I have seen examples of others which have been less so.
This is an area of the FCA’s regulation which is working and working well.
