An assessment of value: Helpful or a fudge?
Poring through the FCA's new regulations
Depeche Mode once sang 'Everything Counts' – and that is exactly what the new regulations that apply to funds under the Financial Conduct Authority (FCA)’s Assessment of Value seek to identify.
The new regulations come into force from 30 September 2019 and are designed to strengthen the existing duty of care to investors through enhanced governance provision.
The exact nature of the policy requires fund managers with funds with a year-end on the 30 September or later to carry out, and publish a value statement within four months of the accounting period end.
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The latter point has recently been relaxed, allowing groups with multiple fund families to batch the production of the value assessment reports, on the proviso they state within the set time period when the reports are to be issued.
The FCA has set out a "non-exhaustive list of elements prescribed for the assessment" of seven criteria: quality of service, performance, AFM costs, economies of scale, comparable market rates, compare services and classes of units.
The criteria are closely aligned to those used in the US, so for US businesses operating in the UK there will already be an understanding of the new regime.
There has been some consternation within the market that the FCA has not provided a template for completion of the assessment.
However, the regulator is looking for competitive forces to drive the production through the adoption of best practice.
There is a degree of scepticism that this will work, but given the attention these reports will receive from all areas of the media, advisers and the consumer, it is undoubtedly that competitors will be scrutinising the reports produced and that some level of plagiarism of good ideas will take place.
The lack of standardisation will lead to some short-term confusion, but I am of the belief that within two years there will be an industry standard in place based on market feedback.
Having met with more than 30 groups in recent months on this subject, there is a variety of opinions on how the value report will be produced and published.
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These range from the recognition this could, or should provide, a valuable marketing tool, to the worry that we end up in a further useless paper chase.
When published, I do expect the focus in the assessment will be on ‘performance' and ‘fund manager costs'.
On the latter, there is a strong desire from both the FCA and the Investment Association to move to the provision of a single-cost figure.
The figure should include the transaction costs, and we are aware through our discussions that a number of fund managers are intending to include these costs in their reports.
The introduction of the value assessment will be a catalyst for changes, but this will not happen overnight.
My expectation is we will see numerous modifications - to include pricing initiatives, fund consolidation and re-evaluation of strategies and their managers.
Steve Kenny is commercial director at Square Mile Investment Consulting and Research
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