FCA reminds asset managers of importance of meeting investors’ expectations

Asset managers included in a review undertaken by the Financial Conduct Authority (FCA) are generally taking the right steps to ensure they manage funds as they say they will. But while most funds in the sample are investing in line with their stated strategy, the FCA did find examples of unclear product descriptions and inadequate governance or oversight.

Megan Butler, FCA director of supervision - investment, wholesale and specialists, said:

“Firms are generally managing funds as they say they will. In most circumstances they are clear about how they are going to invest and have the correct level of oversight to ensure practice follows promise.

“However, the industry needs to consider how it communicates when funds are linked to financial benchmarks. It is also vital that funds keep investment practices under review so they match their stated aims and strategy, irrespective of whether the fund is still actively marketed, because investors base their decisions on this information.”

The FCA’s review considered whether UK authorised investment funds and segregated mandates operated in line with investors’ expectations as set by marketing and disclosure material, and investment mandates. This was assessed against FCA rules and did not focus on fund performance. The review also considered how firms monitored the appropriate distribution of their funds. The review covered 19 UK fund management firms responsible for 23 UK authorised funds and four segregated mandates.

Funds that were clear with investors provided a thorough explanation of their investment strategy, as well as specific information about the aims and asset allocation of the fund. However, some funds were not providing a clear enough explanation of how they were managed. For example, some failed to disclose a constrained investment strategy and one included jargon that ordinary investors would be unlikely to understand.

To ensure investors’ expectations are met, fund management firms must have appropriate oversight to make sure the fund is being managed in accordance with its stated investment policy. The FCA was concerned that this was not happening properly with the funds in its sample that were no longer marketed to consumers. None of these funds clearly disclosed the investment strategy to customers.

Fund managers have a responsibility to ensure that their funds are sold appropriately through third parties. Not all the firms sampled carefully monitored the distribution of their funds. For example, the FCA found two funds that were available on execution-only platforms when the fund management company had planned for them to be available only with advice. In contrast, five firms were investing in smarter ways to analyse data from their distributors to better understand the types of customers that were investing in their funds.

All fund management firms should consider the findings in this paper and review their arrangements accordingly.

The FCA is writing to all the firms in its review to provide individual feedback. Fund management firms that did not effectively manage risks that could lead to poor customer outcomes will be required to make improvements to their practices. The FCA is already requiring the most significant issues to be addressed.

The UK fund industry plays a vital role in delivering financial investment services to customers, managing over £6 trillion of assets. Firms in this industry manage UK domiciled funds worth more than £800 billion on behalf of institutional and retail investors.

In November 2015, the FCA published the Terms of Reference for its asset management market study. The aim of the study will be to understand whether competition is working effectively to enable investors to get value for money when purchasing asset management services. The FCA expects to publish an interim report in summer 2016.

Notes to editors

  1. TR16/3: Meeting investors' expectations
  2. The FCA’s asset management market study
  3. On the 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
  4. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
  5. Find out more information about the FCA.