Funds face difficulty in explaining what they do, regulator finds

Fund management firms are concerned that they will not be able to explain fund objectives to UK consumers because of complex financial jargon.

Fund literature – such as the ‘key investor information documents’ – will not have enough space in them, they say.

The Financial Conduct Authority (FCA) has published new rules and guidance to improve the quality of fund information as part of its programme to make asset management in the UK more competitive.

The FCA acknowledged that a “significant number” of respondents to consultation raised concerns about how they could explain fund objectives clearly and concisely and that many had said there was not enough space in mandatory fund documents.

Rules and guidance for the clearer explanation of fund objectives form part of the FCA’s Asset Management Market Study project, which the FCA began in 2015.

Among other rules and guidance, the FCA will also require fund managers to explain why or how their funds use particular benchmarks or, if they do not use a benchmark, how investors should assess the performance of a fund. Managers must also reference benchmarks if they use them consistently across the fund’s documents.

Also, where a performance fee is specified in a fund prospectus, it must be calculated based on the scheme’s performance after the deduction of all other fees.

Christopher Woolard, the FCA’s executive director of strategy and competition, said: “We’re working to make competition work better in the asset management market and protect those least able to actively engage with their investments. Today’s [Monday, February 2] remedies build on those we’ve already introduced and will make it easier for investors to choose the best fund for them and help them achieve their investment objectives.”

Chris Cummings, chief executive of The Investment Association, said: “We are committed to increasing transparency and promoting clearer language across the asset management industry. Our customers should be able to easily compare fund information, so that they can choose investment products best suited to their needs. “

Andrew Strange, risk and regulation director at PwC, said: “Having broadly confirmed its rules on the use of benchmarks and fund objectives, firms have now been given the final piece of the Asset Management Market Study jigsaw by the FCA. 

“Firms have been battling with a range of remedies, particularly around the articulation of value. Today’s final rules provide a little more meat on the bones around the use of benchmarks. It’s now down to firms to work out how that builds into their documentation and, crucially, their complex work on value assessments.”

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