It’s been almost a year since the FCA Assessment of Value rules came into force, and many firms would say that due to the FCA’s limited guidance thus far, they are still no clearer as to what a good value statement look like.
Well, those firms are now in luck, and may be finding out very soon what good looks like, and in turn, what bad looks like.
If they are especially lucky, the FCA may even comment specifically on their statement.
As reported by the FT last week, the FCA are holding discussions with fund managers to ascertain whether they are complying with the rules. The initial indications coming from the industry are that the FCA are not happy.
From reading my fair share of these AoV reports, it was clear from the start that there were far too many firms that have given a half-hearted effort, and by doing so, have contributed to the continuing erosion of investor trust in the fund industry.
A snippet from one of my new favourites on performance has to be:
“The Fund has … underperformed its performance comparator over these periods (one, three and five years) … the Fund does not have an objective to outperform the sector on a total return basis”
Although, you would struggle to beat this informative one liner:
“It is the opinion of the ACD that the fees charged to the scheme property of the Funds represent value for money for investors taking into account the criteria set out by the Regulator.”
No numbers, no facts, no evidence. Some firms may not want to overwhelm investors with too much information, but statements like the above are not what the FCA had in mind for communications to investors to be in a clear and user-friendly format.
When the FCA introduced the rules last September, they purposely did not provide much detail on how managers should conduct the assessment. Instead, hoping (albeit naively), that managers would do the right thing by their investors.
Conversely, those same managers complaining about the lack of prescribed processes and guidance, would probably also be the ones complaining about a box ticking exercise, should the FCA have provided rules that were too prescriptive.
It would seem that the FCA have asked fund managers to mark their own homework, and are now not impressed with how they have graded themselves. With the FCA currently undertaking the review, what trends will they see in the early publications?
Performance
It may come as a surprise, but some firms have admitting to underperformance. Whilst the manner and detail in which they divulge this information widely varies, one consistent phrase amongst the underperformers is that they all are going to “continue to monitor” the performance. This seems like the bare minimum of what you would be expecting firms to be doing.
The FCA requires asset managers to “take corrective action” on funds that do not provide value. Whilst admitting to underperformance is a big step, the challenge will be next year when they must re-assess performance having had to take corrective action.
We’ve seen some surprising conclusions on the overall value offered. One firm, despite the majority of their funds underperforming against their relative sector, and the admission that its structures resulted in “higher fees”, concluded that their funds either “demonstrated” or “represented” value for investors. This is perhaps a perfect example of firms acting within the letter of the law but not the spirit the FCA intended.
“Funds offered to retail investors in the UK do not consistently deliver good value, frequently due to failure to identify and manage conflicts of interest.” – FCA Asset Management Portfolio Letter
Corrective action
A disappointing statistic coming from the Fund Boards Council, is that only 4 per cent made a clear effort to identify corrective action to improve the value of the fund.
It would be naive to have expected firms across the board to admit to failures in delivering value, however, those willing to admit the need to improve value and taking corrective actions to enhance the value offered may be seen in a better light than those attempting to pull the wool over investors’ eyes. “Failing” the assessment of value does not necessarily need to be perceived in a negative light, provided the asset manager is willing to take corrective action.
One of the earlier publishers of the value statement lowered the fees of five investment funds to offer better value – this honest assessment should be championed by investors not only because of the lower fees, but also for the higher standard of fund governance displayed.
As a caveat to the above, it should also be noted, that just because a fund lowers its fees, doesn’t necessarily mean the fund is miraculously now offering good value. It may just be, that a poor performing fund, is now just cheaper and still not offering value to investors.
Further corrective action stemming from the fact the value assessment is conducted at a share class level is that thousands of investors have been transferred from higher cost legacy share classes. This move, likely to be replicated across the industry, has seen investors moved into “clean share classes” that were introduced in response to the 2013 Retail Distribution Review.
Transparency and accessibility of information
In terms of how and where firms are publishing the report, whilst many have designated sections on their websites for their value statements or have the location of the report well signposted, some firms require a deep dive into their website to locate the document. Others have opted to provide the statement in the middle of an Annual report.
The requirements merely state that the report be “made available to the public”, and allows for the assessment to be made available in the fund’s annual report or in a separate document. However, providing the reports in difficult to find locations is once again, not within the spirit of the regulations and only fuels suggestions of something to hide.
In terms of readability and coherence, some assessments were tougher reads than others, both in terms of narrative-heavy reporting and unfriendly formatting. Effective communication to improve consumer choice and decision-making is something the FCA have aimed to achieve. Striking the right balance between an informative assessment and information overload certainly seems to have been a major challenge faced by many managers.
On the contrary to heavy text laden reports, others looked like a school homework completed last minute just before class was due to start – a few sentences barely providing any relevant information, barely considering the FCA criteria. A copy and paste job for each scheme with the names changed.
High-level MI
A nice feature, which does seem to achieve the FCA’s aspiration for simpler customer communication, but which doesn’t seem to have been utilised in too many reports, is the use of “RAG” dashboards summarising the outcome of the review against the seven assessment criteria set by the FCA, clearly identifying the performance of the funds.
One issue with those that have used RAG dashboards is that it is not always clear what that amber icon represents – Some firms provided a better definition, “fund provides value but merits some action or further monitoring”, whilst others merely stated “fair”. Does that mean performance is not great but it’s okay? Or does it mean that attention is required? Or does it act as an early warning that performance might be going off-track? If firms are to use RAG dashboards, due to the generally intuitive nature of them, they must take the time to clarify what each RAG rating means and not use it as a tool to twist the interpretations of the KPIs. Furthermore, if firms are giving an honest assessment, then perhaps red should not be avoided like the plague.
Another approach has seen the use of a pass/fail scorecard of simple but effective ticks and crosses. Where the results highlighted factors that need to be addressed, additional analysis and reasoning was provided in a separate section.
Summary
The FCA Assessment of Value is by no means perfect. However, it is a start to putting the spotlight on mangers that provide poor value with impunity and suffer no repercussions. Hopefully, once the regulations have had time to mature, and the FCA provide feedback on good practices, the value statements will contribute to greater value being offered to investors.
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