Fund managers ‘still have work to do’ when marking their own homework

The Financial Conduct Authority (FCA) has found that fund managers still have room for improvement in terms of how they assess the value they offer to customers and what remedial actions they take.

The City watchdog requires fund groups to carry out an annual “assessment of value” report for their fund range, considering factors such as performance and fees.

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Introduced in 2019, the FCA found that companies were getting better at marking their own homework and making positive changes for customers, but there was still room for improvement.

It noted that value assessments “significantly improved”, but there was “still work to do”.

The FCA added that many firms had taken remedial action when poor value was identified, including some reductions in fund fees, typically by a few basis points. One basis point is 0.01%.

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“Overall, this amounted to savings for fund investors of millions of pounds. We also saw some firms move investors in pre-Retail Distribution Review (RDR) share classes to 'clean’ classes with no trail commission. The savings for these investors were even more significant,” the FCA said.

However, while the watchdog found firms had a better understanding of the need to justify fees, most remedial action did not involve cutting funds’ fees.

“Where fees were cut, the share class fee reductions were almost always driven by adverse comparable market rate findings rather than other considerations,” it said.

This suggests that fund managers continue to “cluster” around price points identified, which could be considered a market failure. Some firms cited erroneous operational or regulatory barriers to reducing fees, the FCA noted.

It said there were tensions between maximising profits on popular funds and cutting fees in the interest of customers.

“Firms that fail to make reasonable decisions to deliver good outcomes will likely fall short of the standards expected to comply with our rules,” the FCA said.

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One fund group that took action recently was Baillie Gifford. It shut the £141 million British Smaller Companies fund after a sustained period of poor performance.

Baillie Gifford said the fund was closed because investment performance had not met clients’ expectations over the long term and investor demand for the sector and the fund itself had been weak for a number of years.

On 31 July 2023, the FCA’s Consumer Duty came into force. It requires firms to act to deliver good outcomes for retail customers. This means that fund groups will be under great pressure to deliver fair value.