The FCA’s assessment of value initiative will likely not change behaviour significantly in the next few years but marks an interesting step in the drive for improved standards of governance, transparency and accountability in the asset management industry.
Key message:
The FCA’s assessment of value initiative will likely not change behaviour significantly in the next few years but marks an interesting step in the drive for improved standards of governance, transparency and accountability in the asset management industry.
Headlines:
- The assessment of value initiative is not going to lead to significant changes, but will likely bring about some sort of rationalisation over the next five years.
- Ultimately, it will become a ‘hygiene factor’: a small part of the broader trend towards greater governance and transparency in the asset management industry.
- Firms’ approaches have so far differed significantly, and some are doing a much better job than others.
Key themes:
- The FCA was wise to avoid being prescriptive as this prevented it from becoming a ‘box ticking’ exercise. This poses an interesting challenge to the industry: it both has to consider and define value to itself, perhaps for the first time, and then has to consider how to articulate it to the marketplace.
- Importantly, companies have a certain amount of freedom. The FCA has outlined seven criteria that companies ought to measure their fund against, yet they are able to choose a smaller number of them, provided they credibly justify their decision.
- We have seen a handful so far, and they vary in both style and quality. Some are poor: they have not clearly explained the thinking behind them, and have adopted a legalistic, ‘templated’ style with no reference to the Board’s input.
The common features of the best reports:
- Delegates were interested to discuss the common features of the best reports. One key criterion is that the Board’s and Chair’s roles should be very clear, with a thoroughly-explained review process for funds, should they underperform.
- It was noted that one firm put the photos and contact details of the Board members at the outset, which sends a positive signal. It is crucial that reports include an appropriate level of detail, as some have been bloated, and others too brief. It certainly should not be hidden in an obscure corner of the company’s website.
- In the short-medium term, however, we are unlikely to see fees being slashed, at least not significantly. We won’t see mergers, either. What we are likely to see, however, is some kind of rationalisation over a 3- or 4-year period.
- Looking ahead, we will inevitably see similar regulations emerge across Europe, with the ESMA leadership having been advocating greater cost transparency and evaluation in recent months. The advent of cross-border considerations will be a headache for asset management firms, and inevitably lead to some major commercial decisions.
- While the assessment of value is undoubtedly important, the other, and more significant, aspect of the FCA’s market study is its look at governance.
- When considering the well-publicised issues in recent years, the common ingredient is an abject lack of governance over conduct. Boards’ increasingly important role in overseeing funds on a product level is going to be much more materially significant than the assessment of value.
- Indeed, while there has been much discussion of what asset managers are doing in terms of ESG, the focus has been firmly on what they invest in and the products they are creating and managing. However, the spotlight is set to be shone on how they are encouraging good governance in their own companies, with investors likely to apply pressure here in coming years. While this is not a natural consequence of the market study, it is something that will be talked about in relation to the increased role of governance in coming years.
- In 3 years’ time, we are likely to see something approaching a template, or at least some sort of convergence in style. The assessment of value will never become an important consideration; it will likely become a ‘hygiene factor’ usurped in importance by other governance and transparency considerations.
Conclusions:
- The assessment of value is to be welcomed, but will likely not fundamentally change the behaviour of investment managers or investors in the short-medium term.
- Firms need to approach it in an open and accountable style.
- After a few years, it will likely become a ‘hygiene factor’ and the conversation will have moved onto the wider issues of governance and transparency.
