Among other things, the rules require firms to carry out annual assessments of the fees charged by their funds and whether these costs are justified by the value investors receive in return. The rules also require fund managers to report their findings to investors.
The FCA first assessed compliance with the rules in 2021. The latest review found that firms have made significant improvement since then.
Many firms have taken “remedial action” in cases where they concluded that their funds were providing poor value to investors — often by cutting their fees or by shifting investors into fund classes that don’t pay trailer commissions. These actions have saved investors millions, the FCA concluded.
However, it noted the fund industry could be doing better.
“While we found firms had a better understanding for the need to justify fees, most remedial action did not involve cutting funds’ fees,” the FCA said.
And when fund firms did cut their fees, it was often to bring fees in line with competitors’ funds rather than being driven by investor value considerations — a finding that points to a continued lack of competition in the sector.
“Tensions between a fund’s profitability for a firm and assessing the fund’s value for money for investors appear to be influencing […] decision making and outcomes,” the review said, noting that it’s a conflict for fund boards to manage.
Managing these conflicts is particularly important given the new consumer duty that took effect on July 31, which requires firms to deliver value for retail investors.
“It is vital that firms make sure they are not solely focused on a fund’s profitability over value for money for investors,” said Camille Blackburn, director of wholesale buy-side at the FCA, in a release.
The FCA called on firms to review its latest findings and to make improvements to their own processes.
