Introduction
In the realm of financial regulation, transparency and accountability are paramount. To uphold these principles, the Financial Conduct Authority (FCA) has conducted a rigorous multi-firm review of the assessment of value (AoV) processes employed by authorized fund managers (AFMs). The review, published on August 10, 2023, builds upon the FCA's initial assessment in July 2021, aiming to identify improvements in compliance with COLL rules and areas where further enhancements are needed. This blog delves into the FCA's findings, highlighting notable conclusions and encouraging firms to evaluate their own processes.
Building on Past Insights
The FCA's decision to conduct a second review stems from its earlier observation that many AFMs had not implemented AoV arrangements in line with the regulatory expectations. The subsequent multi-firm review aimed to assess the extent to which firms have incorporated COLL rules on AoVs, taking into account the FCA's initial findings from 2021.
Key Conclusions and Insights
The FCA's press release highlighted several significant conclusions drawn from its review, offering insights into the state of the industry's AoV processes:
Notable Improvements: The FCA acknowledged "significant" improvements since its initial review in 2021. This suggests that firms have taken steps to address the regulatory gaps identified earlier.
Good Practice Examples: The review highlighted instances of positive practices within the industry, such as transitioning investors to clean share classes without trail commissions or reducing fund fees. These practices reflect a commitment to enhancing value for investors.
Challenges from Non-Executive Directors: Some AFMs' independent non-executive directors were found lacking in providing sufficient challenge. Instances were noted where information presented to boards was accepted at face value without deeper probing.
Assessment of Fund Performance: The review revealed significant disparities between good and poor practices in how AFMs assess their funds' performance. This underscores the importance of adopting standardized and transparent assessment methodologies.
Justifying Fees: Firms were cautioned against relying solely on comparable market rates to justify fees. Instead, the FCA stressed the need for a comprehensive evaluation using a range of value assessment considerations.
AFM Costs and Economies of Scale: While some firms had made progress in refining processes for allocating costs, the FCA found discrepancies in reaching conclusions on AFM Costs and Economies of Scale. The review cautioned against ignoring relevant information during this process.
A Glimpse into the Consumer Duty
The FCA acknowledged that the Consumer Duty was not applicable at the time of its review. While the AoV rules and guidance have filled the void of the Consumer Duty's price and value outcome rules, the FCA emphasized that the Consumer Duty encompasses broader aspects beyond pricing and value. It urged firms to adopt a holistic approach in aligning with all facets of the Consumer Duty.
A Call to Action
In light of the FCA's findings, the regulatory body has called upon firms to reflect on their own processes and assess their compliance quality. The FCA's commitment to accountability is palpable as it emphasizes that outliers will be subject to further scrutiny and necessary actions to ensure compliance with AoV rules and expectations.
Conclusion
The FCA's multi-firm review marks a significant step toward fostering transparency, accountability, and improved value assessment within the financial industry. As AFMs strive to align with regulatory expectations, the lessons from this review serve as a compass for driving positive change. By heeding the FCA's insights, firms can enhance their AoV processes, uphold the principles of the Consumer Duty, and ultimately create an environment that safeguards the interests of investors and bolsters the integrity of the financial sector.
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