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Legal Update

Are firms complying with key responsibilities towards investors?

23 June 2016
Mayer Brown Legal Update

The Financial Conduct Authority ("FCA") has said asset management firms are "taking the right steps" to meet investors' expectations but improvements are required in investor communications, oversight of fund performance and control of distribution channels. It also provided specific guidance on "closet trackers" – actively-managed funds that closely mimic their benchmark – for the first time. These findings were contained in the FCA's Thematic Review: Meeting Investors' Expectations, which was conducted to ensure fund managers and distributors are complying with their responsibilities towards investors. It considered UCITS schemes sold to retail investors, however the FCA has made clear the findings have wide application to all fund management firms and distributors. The FCA has identified three areas where improvements could be made.

1. Communications with investors
The Review stressed that firms need to improve the clarity of product descriptions when disclosing the fund's strategy and how fund managers invest fund assets. Information about risks should be clear, thorough and consistent, with information directed at a fund's target market and included in the prospectus, Key Investor Information Document ("KIIDs") and fund factsheets. The FCA often found firms did not provide enough information or used industry jargon, making it harder for customers to make informed decisions.

The FCA highlighted that when firms draft product descriptions they should:

  • include quantifiable performance targets;
  • be specific about financial instruments used for the fund;
  • include investment criteria for certain assets, for example minimum bond credit ratings;
  • explain steps taken when choosing assets to invest in;
  • recommend customers seek advice for complex funds;
  • ensure all literature is reviewed by someone who understands the fund;
  • include fund managers in the drafting process; and
  • undertake end-customer testing.

The FCA expressed particular concern when funds did not disclose that investment strategies were constrained by a policy. In particular, the FCA emphasised that these managers of closet trackers must disclose their strategy so investors can assess the level of risk and return they may get and compare it to investing in other products that track the relevant index.

This is the first time the FCA has provided specific guidance on closet trackers with a firm steer that asset managers need to make appropriate disclosure of such strategies to investors. In its Wholesale Competition Review, the FCA highlighted that closet tracking might be indicative of a market where asset manager and investor incentives are misaligned. The FCA has said it will look at closet trackers as part of its ongoing asset management market study and this may lead to new interventions and recommendations.

2. Adequate oversight and governance
The FCA said funds generally had appropriate controls to monitor and review asset types regularly, amounts invested in funds and the fund's investment approach. However, fund management firms should always act in investors' interests when operating or managing funds and funds should be monitored throughout their lifetime, not just when they are actively marketed.

3. Appropriate distribution
The FCA stressed that firms should control platforms and review distribution to ensure funds are distributed appropriately because investors mainly buy funds through advisers and platforms, rather than directly from fund management firms.

Firms should conduct due diligence on financial advisers and review sales patterns and other indicators to highlight irregular distribution patterns and resolve issues quickly. Investment materials should also make it clear whether documents are targeted at professional or retail investors. It is the responsibility of both the fund management firm and the distributor to provide appropriate information to investors and distributors must ensure the correct information is provided to intended readers.

Next steps
The FCA said firms should review their operations in light of the Review and distributors should consider their responsibilities. Senior managers must take action if any of the concerns raised by the FCA are reflected in their firms to minimise the risk of poor outcomes for customers.

This article first appeared in Investment Week on 5 June 2016 and can be accessed here.

Authors

  • Mark Compton
    T +44 20 3130 3388
  • Tim Nosworthy
    T +44 20 3130 3829
  • Guy Wilkes
    Partner
    T +44 20 3130 3355
  • Lauren Smith
    Associate
    T +44 20 3130 3134

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