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FCA says firms’ Assessments of Value lack credibility

FCA assessment of valueFund management firms in a sample study were not implementing rules that should demonstrate how much value they provide to clients.

The Financial Conduct Authority (FCA) said most of the 18 firms it reviewed had not implemented Assessment of Value (AoV) arrangements that met FCA standards.

AoV rules were brought into force in 2019 and require firms to justify their fund fees by demonstrating value based on certain criteria such as performance, costs and savings from economies of scale.

The findings will be a disappointment to the FCA which has increased scrutiny of asset managers in recent years and whose AoV regime is expected to set the standard elsewhere in Europe.

However, the firms have escaped any tough regulatory action, such as fines.

Reporting on its review, which happened between July 2020 and May 2021, the FCA said “too many” of the fund managers often made assumptions that could not be justified when challenged by the regulator, and that this undermined the credibility of their assessments.

Many firms did not consider what the fund’s performance should deliver when set against the investment policy, investment strategy and fees. 

Firms spent a disproportionate amount of time looking for savings in administration service charges that the FCA said cost investors relatively little compared with the time spent reviewing the costs of asset management and distribution that typically cost investors much more.

Other firms had poorly designed processes that led to incomplete value assessments – for example, failing to assess elements such as fund performance, costs and classes of units, or failing to perform assessments at share class level.

Some of the independent directors on the Boards of fund managers “did not provide the robust challenge we expect and appeared to lack sufficient understanding of relevant fund rules”.

The FCA added: “Overall, we expect more rigour from AFMs [authorised fund managers] when assessing value in funds. This will help ensure that investment products represent good value.”

Fund managers are now expected to study the findings, use them to assess their AoV processes, and make necessary changes ahead of an intended further review in 12 to 18 months. 

“We will consider other regulatory tools should we find firms are not meeting the standards we expect to be necessary to comply with our rules,” the regulator said.

Jonathan Lipkin, director of policy, strategy and research at the Investment Association, said: "As AFM boards gain experience and understanding of this process, and the expectations of the regulator are further articulated, there are inevitably lessons to learn. It is clear from these findings that the industry needs to actively build on experience to date to ensure Assessments of Value deliver for investors. We will continue to work with firms as they improve their processes for performing and reporting these assessments.”

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