What do new FCA rules mean for asset managers?
Anyone who has paid attention to the news over recent years will doubtless have noticed that regulators of all kinds are pushing hard for businesses to demonstrate maximum transparency towards those who use their services. They might also have noticed that the definition of “business” can be very broad, for example, the Competition and Markets Authority is now putting social-media influencers under heavy pressure to disclose when they receive payment from brands, even if that is payment in kind (e.g. free goods). It is therefore hardly a surprise that the FCA is laying down more stringent rules for asset managers. Here is a quick guide to what they are and what they mean.
Guidance on how fund managers should describe fund objectives and investment policies
There is a very fine line between justifiable positivity and misrepresentation and the FCA wants to make sure that fund managers stay on the right side of it. In this context, it’s worth remembering that the FCA was created to replace the old FSA, which proved singularly ineffective at performing its task of effectively regulating the financial-services industry. While the 2008 financial crisis was arguably its most spectacular failure, it also failed to pick up on (and stop) the PPI scandal. The FCA can, therefore, be expected to be very aware of the need to set clear, understandable rules, for those involved in financial services – and to ensure that they are followed.
Guidance on how fund managers should measure the performance of a fund
In the real world, the performance of an investment is not measured in abstract terms, but rather against fair comparables. For example, while it would be absolutely unreasonable to measure the performance of a government bond against an AIM share, it would be perfectly reasonable to measure the performance of bonds issued by government A against bonds issued by government B or against bonds issued by “blue chip” companies. For this reason, investors need to have a point of comparison by which to measure the success or otherwise of their fund. Per the new FCA rules, asset managers should either use a stated benchmark or provide an alternative measure by which the performance of their fund can be reasonably measured. Furthermore, where asset managers do use a benchmark, they need to explain why and/or how this benchmark is used and to use it consistently across all communications.
Guidance on how to demonstrate past performance
For similar reasons, when fund managers reference the past performance of a fund, they must now do so using the same criteria (e.g. benchmarks) as they use to demonstrate the actual performance of a fund. Essentially fund managers must be consistent in their communications.
Guidance on the requirement for clarity around performance fees
Asset managers have long been mandated to disclose fees and charges, the new rules take this a step further and require that fund managers who specify a performance fee in the prospectus for their fund must calculate this performance fee on the basis of the scheme’s net performance, which is to say how well the scheme has performed after the deduction of all other fees.
Further changes are to be expected
The Cost Transparency Initiative was launched in late November of last year (2018) and, as its name suggests, it aims to improve the transparency of costs and charges for institutional investors. It is the CTAs stated goal to introduce “transparency templates”, which will standardise the presentation of cost and charge information in the asset management and pensions industries. It is intended that this change will be implemented in full over the course of 2019.
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