On 4th February 2019, the FCA published Policy Statement 19/4 setting out its final rules and guidance designed to address some of the findings of the Asset Management Market Study (“AMMS“). This followed the FCA’s Consultation Paper 18/9, which sought views on changes intended to address concerns that fund objectives were not as clear or specific as they should be and that fund benchmarks are not always presented consistently and appropriately.
The key rule changes in the policy statement are summarised below:
The FCA reiterated that it expects fund managers to explain what their funds are doing in consumer-friendly language. It has therefore chosen to publish non-Handbook guidance setting out its expectations on how firms might comply with the existing requirements in practice. The guidance stipulates that a fund manager should generally include a description of the investment strategy in key information documents where it is necessary to describe the objectives and investment policy. The FCA believes that the new guidance will help fund managers make objectives more meaningful to consumers and assist consumers in comparing their investment options more effectively and making investment decisions more aligned to their needs and expectations.
The FCA has decided to impose new rules requiring fund managers to explain why they use particular benchmarks or, where they do not use benchmarks, explain how investors may assess the performance of a fund. The new requirements also state that, when a fund manager presents a fund’s past performance, it should do so against each benchmark used as a constraint on portfolio construction and that any benchmarks used should be referenced consistently across the fund’s documentation. The FCA has amended COBS 4.5.14R to reflect these changes.
The rules changes will come into force on 7 May 2019 for new funds and 7 August 2019 for existing funds. This is despite criticism in some corners of the industry that the guidance on fund objectives will necessitate new internal governance and sign off procedures and that the new benchmark requirements could lead to increased costs in accessing benchmarks.
The FCA also took the opportunity to clarify that performance fees specified in a prospectus must be calculated on the basis of a scheme’s performance after deduction of all other fees.
Future developments – including policy changes targeting non-UCITS retail schemes
The FCA is expected to be increasingly active in the funds space in the next few months. The rule changes outlined above were the second set of remedies which have been implemented following the findings of AMMS with further policy announcements likely to follow later this year once the proposals from the FCA’s Consultation Paper 18/27 (“CP 18/27“) are finalised.
The consultation for CP 18/27 closed on 25th January and contained various proposals designed to prevent the wider market disruption seen in the aftermath of the UK’s vote to leave the European Union in June 2016. The changes are particularly focused on Non-UCITS Retail Schemes (“NURS“) which invest in illiquid assets such as property. The FCA’s package of measures includes:
- requirements for funds to suspend trading on public markets when an independent valuer expresses uncertainty about the value of “immovable” assets such as commercial property that accounts for a significant part (the FCA specified 20%) of the fund’s assets;
- an obligation on fund managers investing in mainly illiquid assets to produce contingency plans in case of a liquidity risk crystallising;
- requirements for more information to be disclosed about the liquidity risks in such funds, the liquidity management tools available to the fund manager and the circumstances in which they may be used; and
- an obligation for depositaries to oversee the liquidity management process in these funds.
The proposed rule changes are intended to help retail investors understand any restrictions placed on access to their investments and reduce the likelihood of disorderly exits from NURS which could benefit certain investors at the expense of others or substantially reduce the value of investments for those left in the fund.
However, critics have contended that mandatory suspensions of trading could impact an investor’s ability to redeem their holdings during a period of market uncertainty. Concerns have also been raised around the challenges inherent in determining when there is “material uncertainty” about the price of such illiquid assets for the purposes of the 20% threshold.
The FCA expects to publish final rules and a policy statement in response to CP 18/27 later in 2019. Any rules and guidance will only come into force one year later in 2020.