Assessment of Value – still work in progress?
The?#FCA reported its latest findings for firms required to produce an Assessment of Value (AoV) statement for UK registered funds on the 10th August.?14 Authorised Fund Managers (AFMs) were involved in this second survey from November 2022 to March 2023 which reviews the progress made from the first survey conducted in July 2021.
The requirement to issue an annual assessment based on 7 criteria was introduced in 2018 as part of the package of obligations for Asset Managers from the Asset Management Market Study (AMMS).?These requirements were incorporated into the Collective Investment Schemes sourcebook (COLL) and include the obligations to notify investors of the assessment findings and for independent directors to oversee
Key findings summary
- All firms visited had performed a gap analysis
on the July 2021 findings but a number had overlooked the key findings with some taking no action, believing they were not relevant due to ?firm size or business model - Firms who have not incorporated their AoV as BAU struggled to demonstrate a strong assessment of value
- Some AFMs cited having limited influence over fund fees but the FCA is at pains to point out that SMFs and Boards, regardless of inputs from perceived more senior groups or parties, are still responsible under COLL for the completion and fee justification of AoVs
- There is still a lack of challenge from INEDS, with some believing they shouldn’t review the AoV methodologies and could accept at face value information provided to Boards.?There was evidence of lack of knowledge of firms’ process in relation to performance, AFM costs and even the objectives of the AoV process as a whole
- Incorporating ESG
as part of quality of service highlighted some good practice especially where it is merely an extension of the investment process.? - A few firms continue to use low compliant and investment breach numbers to justify positive quality scores, whereas the FCA considers these hygiene factors and pointed out that firms should ensure this data should detract from scoring where there is poor performance
- The differences between good and poor practice when considering the performance criteria continue.?Good practice includes those giving a poor rating to funds who had achieved capital growth but significantly underperformed against benchmark, whereas poor practice included actively managed funds receiving a good rating despite underperforming the market benchmark consistently over a 5 year period
- The FCA noted significant improvement in the assessment of Multi Asset Funds (MAFs) and Fund of Funds (FoFs), excepting a few firms were still only comparing MAFs performance with those of competitors rather than benchmarks or relative passive funds
- There remains “tension†between a fund’s profitability and the value for money for investors
which is driving decision making and outcomes.?Managing this conflict is a responsibility of the Board and SMFs - Most remedial action did not include cutting fund fees - the suggestion being ??there is still a “cluster†of AFMs around the price points indicating?there is still a limited number of firms wishing to put their head above the parapet and take a radical approach to pricing.
The AoV is now in sharper relief with the added?dynamic of the Consumer Duty obligations.?Distributors in the supply chain of these products should be reviewing the AoV with renewed rigor taking note of the findings in this latest survey.?The full report is here Authorised fund managers’ assessments of fund value 2023 | FCA
The FCA make it clear in this survey, believing AoV is a critical assessment to “delivering value in the sector, helping to evaluate the price and value outcome rules of the Consumer Duty.?But the Duty is much broader than just the price and value outcome, covering the full product lifecycle, from product design to consumer communications and support on an ongoing basisâ€. ?
In conclusion, if this was a school report, it might say… “improvement in a number of areas but still has work to doâ€.?Maybe, Consumer Duty and distributors will start to apply the pressure on AFMs to make sure the fund products deliver on their value promises.
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Of note - there is?external scrutiny of the AoV initiative by other overseas regulators.?We know the European Funds market is considering its own interpretation of “value for money†from collective products for investors so it may not be too long before a similar assessment is required for SICAVs.?
ZISHI has worked with perspective INEDs for AFM Boards, preparing and equipping them with the knowledge required to challenge appropriately
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