The outcomes from the FCA’s Asset Management Market Study (AMMS) are changing the ways fund groups work and even the way they are structured, all in the name of acting in investors’ best interests and delivering better outcomes for them.
A few of the most commented-on changes from the AMMS are the requirement for every authorised fund manager (AFM) to qualify its board with at least two independent Non-Executive Directors (NEDs), the annual obligation for that board to publish an Assessment of Value (AoV) report and the requirement for funds to disclose consistently the existence and purpose of any benchmarks. All of these changes kick in over the next couple of months, with the benchmark changes in place by August (as explained in our earlier blog) and the board structure and AoV reports up and running by September 2019.
The first AoV reports need to be published within four months of the annual accounting date for funds with a year-end of 30 September, ie by the end of January 2020. Other accounting dates follow the same pattern, through to funds with a year-end of 31 August publishing their first reports by 31 December 2020.
The AFM’s chair and independent directors are responsible for overseeing the assessment process, which must cover at least the following areas, as listed in COLL 6.6.21R:
- Quality of service – The range and quality of services provided to unitholders.
- Performance – The performance of the scheme, after deduction of all payments out of scheme property as set out in the prospectus […] considered over an appropriate timescale having regard to the scheme’s investment objectives, policy and strategy.
- AFM costs – general – In relation to each charge, the cost of providing the service…
- Economies of scale – Whether the AFM is able to achieve savings and benefits from economies of scale…
- Comparable market rates – In relation to each service, the market rate for any comparable service provided…by the AFM or…to the AFM or on its behalf…
- Comparable services – In relation to each separate charge, the AFM’s charges […] for comparable services provided to clients, including for institutional mandates of a comparable size…
- Classes of units – Whether it is appropriate for unitholders to hold units in classes subject to higher charges than those applying to other classes of the same scheme with substantially similar rights.
The amount of work, and the amount of data required, to produce AoV reports should not be underestimated, as the report is a combination of factual information (Nos. 2, 3, 5 and 6) and qualitative (Nos. 1, 4 and 7) assessment. The areas focusing on costs mean the report needs to be prepared at share class level and comparisons have to be made with both external (No.5) and internal (No.6) costs.
Boards of funds with a year-end between, say, March and August may feel they are in the sweet spot, as they have a year or more until they need to publish their first reports and they can see what others have published before they need to prepare their own. But it may not be wise to leave it too long, as there is work to do in advance, such as determining the peer group for comparisons, deciding what to do about any economies of scale achieved and reviewing multiple share classes with different charging structures.
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