Skip to main content
The Actuary: The magazine of the Institute and Faculty of Actuaries - return to the homepage Logo of The Actuary website
  • Search
  • Visit The Actuary Magazine on Facebook
  • Visit The Actuary Magazine on LinkedIn
  • Visit @TheActuaryMag on Twitter
Visit the website of the Institute and Faculty of Actuaries Logo of the Institute and Faculty of Actuaries

Main navigation

  • News
  • Features
    • General Features
    • Interviews
    • Students
    • Opinion
  • Topics
  • Knowledge
    • Business Skills
    • Careers
    • Events
    • Predictions by The Actuary
    • Whitepapers
    • Webinars
    • Podcasts
  • Jobs
  • IFoA
    • CEO Comment
    • IFoA News
    • People & Social News
    • President Comment
  • Archive
Quick links:
  • Home
  • The Actuary Issues
  • November 2020
General Features

Investment funds: charging ahead

Open-access content Wednesday 4th November 2020

Brandon Horwitz looks at assessing value for money for investment funds, and how remedies adopted by the FCA aim to build on a duty to act in the best interests of investors

web_20_HIRES-p30-31 Illustration of man sprinting hurdles with wad of cash  Ikon  17864.jpg

Fund management charges have been the subject of increasing scrutiny during the past 10 years. This has been driven by increasing transparency of charges and historically low investment returns. The value for money (VFM) of fund charges has also been in the spotlight, both in the popular financial press and because firms are keen to be compliant with the latest regulations. 

What factors have led to this focus on VFM by regulators? How is VFM now being applied to authorised investment funds? And what action has been taken by firms in response to their assessments of value?

 Leading up to the VFM focus

The current focus can be traced back to the pension mis-selling scandals in the UK between the 1980s and early 2000s. A common theme was the inappropriate switching of customers from lower-cost employer pension schemes to higher-cost personal pensions. Regulatory interventions included introducing stakeholder pensions with a cap on charges (in 2001) and the Treating Customers Fairly principle.

The global financial crisis of 2007-08 was followed by significant falls in equity markets and interest rates as quantitative easing was introduced. This resulted in historically low returns, which in turn shone a light on the impact of charges on these returns.

The Retail Distribution Review, effective from 2013, increased transparency around what customers pay for advice versus charges for investment funds. 

In 2015, we saw the introduction of regulations requiring workplace pension funds to consider VFM. This included obliging those responsible for overseeing these funds to consider the VFM of the pension funds offered and disclose their findings (and resulting actions). 

In 2017, the Financial Conduct Authority (FCA) published the results of its Asset Management Market Study, which raised issues about the VFM for authorised funds. It followed this by publishing detailed regulations for fund managers. 

Authorised funds

Authorised funds are a type of collective investment scheme authorised by the FCA. The two most common types are unit trusts and open-ended investment companies. 

Authorised funds enable individuals to invest in a diversified portfolio of securities (such as equities and bonds) and certain other assets (such as real estate). Investors’ contributions are pooled and invested on their behalf by professional fund managers. 

The UK governance structure for authorised funds is built around the segregation of duties between the authorised fund manager (AFM), who is responsible for investment decisions and compliance with relevant regulation, and the depositary, who is responsible for safeguarding the assets of the authorised fund and overseeing key areas of AFM activities.

Life and pension funds (unit-linked funds) are similar economically to authorised funds, but fall under different regulation (including VFM requirements). 

FCA Table
The FCA’s findings and remedies


The final report of the FCA’s Asset Management Market Study (bit.ly/FCAreportActuary) included key findings such as:

  1. Weak price competition in a number of areas of the asset management industry, illustrated by clustering of fund charges 
  2. Analysis suggesting no clear relationship between actively managed fund charges and the gross performance of these funds, illustrated by limited evidence of these funds beating their benchmark indices on average.

The remedies adopted by the FCA to address these findings aim to build on AFMs’ existing duty to act in the best interests of investors. They require AFMs to assess and justify their fund charges in the context of the overall service and value provided to investors. Importantly, they noted their view that AFMs are the agents of the investors in their funds, and not just ‘product providers’.

The regulator introduced seven specific criteria for AFMs to consider when assessing VFM. AFMs are required to either conclude that each fund offers good VFM or take corrective action if it does not, and to explain the assessment in an annual public report. These criteria are summarised in Table 1, with an interpretation of some of the questions that should be asked to undertake this assessment.

The FCA also introduced the requirement for independent non-executive directors on AFM boards to balance the interests of fund investors and shareholders. This is a nod to the fact that AFM boards are generally staffed exclusively by executives of the fund manager. Boards need to have at least two independent directors, and they should comprise at least 25% of the total board.

Action taken by firms 

Fund managers have been publishing the results of their value assessments during the course of 2020 with a variety of styles, but all aim to cover the FCA’s assessment criteria and generally include some remedies to any issues identified. The most common actions taken are:

  • Reducing charges on some funds
  • Moving investors to lower-charge versions of funds
  • Reviewing or changing investment strategies to improve fund performance (including closing or merging funds where appropriate).

While the quality of reports and actions vary significantly, it appears that the regulation has succeeded in focusing attention onto this important area of VFM for investors. The FCA is to undertake a thematic review of the first value assessments, with findings expected in 2021. 

While any actions taken are likely to benefit investors overall, a key question is whether retail customers will have engaged with published value statements. These customers tend to rank fund performance as the most important VFM factor, according to research from Boring Money (bit.ly/BoringMoneyActuary).  So, while fund managers will have raised their game to comply with the regulations, it’s worth remembering that it is investment performance that matters most to customers when they assess value. 

Brandon Horwitz is an independent consultant, non-executive director and qualified actuary

Image Credit | Ikon
 
ACT Nov20_Full.jpg
This article appeared in our November 2020 issue of The Actuary.
Click here to view this issue
Filed in:
General Features

You might also like...

Share
  • Twitter
  • Facebook
  • Linked in
  • Mail
  • Print

Latest Jobs

Senior Underwriting Risk Manager

London (Central)
£85K-£95K + Benefits
Reference
124386

Reserving Manager (Contract)

London (Central)
£1200 - £1400 per day
Reference
124385

Life Actuary - Contract - IFRS 17 Financial Impact

England, London / England, Bristol / North Yorkshire, England
£900 - £1150 per day
Reference
124384
See all jobs »
 
 

Today's top reads

 
 

Sign up to our newsletter

News, jobs and updates

Sign up

Subscribe to The Actuary

Receive the print edition straight to your door

Subscribe
Spread-iPad-slantB-june.png

Topics

  • Data Science
  • Investment
  • Risk & ERM
  • Pensions
  • Environment
  • Soft skills
  • General Insurance
  • Regulation Standards
  • Health care
  • Technology
  • Reinsurance
  • Global
  • Life insurance
​
FOLLOW US
The Actuary on LinkedIn
@TheActuaryMag on Twitter
Facebook: The Actuary Magazine
CONTACT US
The Actuary
Tel: (+44) 020 7880 6200
​

IFoA

About IFoA
Become an actuary
IFoA Events
About membership

Information

Privacy Policy
Terms & Conditions
Cookie Policy
Think Green

Get in touch

Contact us
Advertise with us
Subscribe to The Actuary Magazine
Contribute

The Actuary Jobs

Actuarial job search
Pensions jobs
General insurance jobs
Solvency II jobs

© 2022 The Actuary. The Actuary is published on behalf of the Institute and Faculty of Actuaries by Redactive Publishing Limited. All rights reserved. Reproduction of any part is not allowed without written permission.

Redactive Media Group Ltd, 71-75 Shelton Street, London WC2H 9JQ