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AFMs receive B+ from the FCA: Good but could do better

15 August 2023. Published by James Wickes, Partner and Sally Lord, Knowledge Lawyer

In the wake of the FCA's new consumer duty requiring firms to deliver good outcomes for consumers that meet their needs and offer fair value, it comes as no surprise that the FCA has 'followed up' on its July 2021 review.

You may recall that the aim of the 2021 review was to identify the processes used by Authorised Fund Managers in carrying out assessments of value for funds they operate, i.e. the FCA wanted to ascertain how well firms had implemented the 2019 Collective Investment Schemes sourcebook (COLL) rules. That review concluded there was "weak demand-side pressure on fund prices, resulting in uncompetitive outcomes for investors in authorised funds".  

Two years on, the FCA has scrutinised the progress firms have made in applying the COLL rules and what action they have taken. Under the COLL rules, firms must justify the fees they are charging investors, what assessments they have undertaken to determine that justification and, what action they are going to take if any assessment means the firm has fallen short and investors have been overcharged. 

In its latest press release on the review, the FCA stated: "many firms have now fully integrated considerations on assessment of value into their product development and fund governance processes" and that this, in turn, has helped increased changes in fees and charges, meaning consumers had saved millions of pounds in costs. 

Following the commencement of the consumer duty, this will come as good news for many. However, whilst the FCA has concluded that many firms have adapted their processes and have a better understanding of what is required of them, some are still falling short of fulfilling their duties. 

In particular, the FCA highlighted an area for focus is ensuring all assessments of their funds are supported by satisfactory evidence and that they are not based on inadequate assumptions. The FCA also urges directors to challenge information presented to them and not to take everything at face value.  If in doubt, firms are to review their processes against the COLL rules and ensure at the very least, the rules' minimum considerations have been met. 

The FCA's latest review also determined that, whilst some firms carried out remedial action, it was rare that any action included a reduction in the firms' fees. Quite simply, the FCA says firms are "putting too much emphasis on comparable market rates to justify their fees, rather than conducting an assessment using the full range of value assessment considerations". 

The FCA has confirmed that, if a firm does not make a reasonable decision and deliver a good outcome, it will not comply with the rules. Camille Blackburn, Director of Wholesale Buy-Side of the FCA lays the responsibility firmly at the door of the authorised fund manager boards and senior managers stating they are "responsible for ensuring value assessments are carried out properly and any issues found are resolved quickly" and emphasises the importance of weighing value for money for consumers over and above profitability for the fund. 

In a market where directors and managers are facing more and more scrutiny and responsibilities, it remains to be seen what the reactions to the FCA's latest review will be. For those already implementing the COLL rules adequately and carrying out appropriate and fully supported assessments it will be 'carry on', but for others the message is loud and clear, they 'must try harder' to implement the requisite standards for their assessments of value. It is clear the FCA is not prepared to let firms slip under the radar, especially if that is to the detriment of the consumer. 

FI/D&O insurers of fund managers ought to be assessing their insureds' processes against the COLL rules to determine whether they are in the B+ category or falling into territory that might lead to FCA investigations/enforcement action, which can give rise to considerable claims under FI/D&O policies.