Assessing the assessors

On 6 July, the FCA published its findings from a market review of Assessment of Value (AoV) reports. The review found a huge variability in the quality of reporting by firms and was critical in several areas, stating that some fund managers “did not meet the standards we expect by using poorly designed processes that led to incomplete assessments of value” and asking for more rigour when compiling reports. While stopping short of stinging criticism, the theme of the review was very much the school report classic ‘could do better’.

We are now just over a year on from the first batch of AoV reports, and the FCA’s review is a good time to look at the background behind this requirement, whether they remain useful tools for judging the quality of a fund, and the future of the reports following the regulator’s recent analysis.

What are Assessments of Value?

“We found that asset management products and services are complicated, objectives may not be clear, fees may not be transparent and investors often do not appear to prioritise value for money effectively.”

The quote above is taken from the FCA’s Asset Management Market Study in 2017, which overall was critical of a number of areas within the investment industry. Following this study, the FCA engaged in various remedial actions; one of these was a new requirement for AoV reports. Fund managers, since the end of 2019, are now obligated to publish an annual appraisal of the value of the services they provide to their investors and make this publicly available. If sufficient value cannot be demonstrated, then firms must outline what corrective actions they will take to address the underlying issues.

The FCA does not prescribe the precise format of these assessments and therefore much of the presentation and content has been left to the discretion of fund managers. This has led to some allegations that managers are in essence being asked to mark their own homework. The regulator does, however, stipulate that – as a minimum standard – each firm’s AoV should address seven core factors.

• Quality of service – what standard of service are investors receiving from the manager?
• Fund performance – how has the fund performed versus its stated objectives and benchmarks?
• Authorised fund manager costs – are investors receiving value for money from the fees they pay?
• Economies of scale – do fund managers pass on economies of scale to investors as their assets under management grow?
• Comparable market rates – how does the value offered by the fund manager compare with similar funds in the wider investment universe?
• Comparable services – is the fund manager’s charging competitive versus other, similar services in the industry?
• Classes of units – if there are cheaper share classes available, is there a rationale for why some investors are in higher-priced units?

All reports should be accessible, free of complexity and jargon and easily digested by a retail investor in order to enable them to make an informed decision regarding the value offered by the funds they are invested in. There is scope for some subjectivity in the assessment of the different factors, given that the FCA has not given strict guidelines for exactly how the reporting should be put together. This non-standardised approach has led to a variety of styles from different firms, with AoVs varying dramatically in length, presentation and depth of content.

Why has the FCA published its review?

Inevitably, the diverse range of approaches taken by different fund managers has led to a wide variation in the standard of reporting, which is the key finding behind the FCA’s recent review. Elsewhere in the industry, there has been previous criticism of AoVs, with industry body the CFA Society also pointing out that the reports were not delivering as intended to investors earlier this year and offering the view that “a significant proportion of reports aren’t up to scratch”.

Within the FCA’s review, a number of key points were raised:

• some firms did not properly consider fund performance in the context of their policies, investment strategies and fees;
• a ‘disproportionate’ amount of time was taken to look for savings in areas such as administration and supplier costs, rather than the much larger costs of asset management and distribution which have a significant impact on investors;
• certain firms completely failed to assess some of the seven factors outlined by the FCA; and
• there was a lack of genuine challenge from the independent directors on firm governing bodies/boards.

The regulator’s review did note, however, that some firms’ AoV reports have been conducted well. There is some evidence from the industry that the assessments have had some practical impact for investors, with Schroders marking some of its funds as poor value and adjusting their fee structure, Blackrock cutting fees for investors and Jupiter closing some funds following the publication of its report in 2020.

With some highlights, but a generally below-par performance, it seems that the industry has been awarded a ‘C-‘ from the FCA this year.

Next steps

There is obviously substantial room for improvement from AoV reports. There are several industry initiatives underway to improve the quality, which should ensure that the overall standard evolves over time. It is also clear, however, that this evolution is not happening quickly enough from the regulator’s perspective, hence the recent nudge from its review.

The intention is that the FCA will review this area again in the next 12 to 18 months, to examine whether its feedback has been considered. If there is no improvement, more robust action will undoubtedly be taken, which could lead to much more rigid rules around AoV content and presentation. Think of this as the polite letter from OFSTED prior to an inspection and special measures!

Despite the flaws highlighted in the regulator’s review, Assessments of Value remain a useful part of the toolkit when undertaking due diligence on a fund or fund manager. They are still a relatively new requirement, with many firms about to publish their second reports. The pressure is now on fund managers to up their game, which ultimately will result in a better outcome for investors and is therefore to be welcomed.