Research

On 5 April 2018 the FCA published proposals to address concerns identified in its asset management market study

The latest proposals are designed to “ensure fund managers compete on the value they deliver” and act in the interests of investors (see our thought leadership piece¹).

In summary, the FCA has published:

• Final rules following the previous consultation addressing the duties of fund managers in relation to investors in their funds (the Final Rules); and
• A new consultation paper on proposed rules and guidance focused on the information that investors receive about funds.

Asset Management Market Study remedies and changes to the FCA handbook

The Final Rules² focus on fund managers' duties as the agents of the investors in their funds and are intended to enhance investor protection. The aim is to provide better protection for all investors; both those who actively monitor their investments and those who do not follow their investments closely.

To this end, the Final Rules strengthen and clarify the duty of managers to act in the best interests of investors by:

• Introducing a requirement for fund managers to make an annual assessment of value;
• Requiring fund managers to appoint a minimum of two independent directors to their boards;
• Introducing a new prescribed responsibility under the FCA's Senior Managers and Certification Regime to bring individual focus and responsibility (the FCA envisage that the chair of the board of the fund manager will usually be responsible for this prescribed responsibility); and
• Introducing technical changes to improve fairness to the manner in which fund managers profit from investors buying and selling their fund interests and facilitate the movement of investors into cheaper share classes.

The New Rules apply to UK fund managers in respect of their management of authorised funds (i.e. onshore UK funds directly regulated by the FCA).

Firms have until 30 September 2019 to implement the rules on assessment of value and appointment of independent directors and until 1 April 2019 to implement the rules related to the way in which fund managers profit from investors buying and selling their funds.

Consultation Paper on remedies related to funds providing investors with better information

The consultation paper³ addresses:

• How fund objectives can be expressed more clearly and be more useful to investors;
• Clarifying for investors when investment funds are bench-mark constrained, or limited in the extent to which their holdings can differ from the weightings of a bench-mark index; and
• Ensuring managers give full and consistent disclosure of how and when a fund uses benchmarks.

The consultation paper proposals apply to UK fund managers of authorised funds.

Observations

The FCA's Final Rules and the new consultation paper are welcome and it is clear that the FCA has paid significant attention to the industry's responses to the initial asset management consultation paper.

The obligations placed on managers in the New Rules and the proposals of the new consultation paper are important for a number of reasons. They illustrate the holistic approach the FCA is adopting to regulation of the asset management industry and consolidates the FCA's approach to cultural change in financial institutions⁴. Further, the New Rules and the consultation paper also support the FCA's understanding of its regulatory role more broadly as expressed in Andrew Bailey's letter⁵ to the Treasury Select Committee in that they support the FCA's operational objectives of securing an appropriate degree of protection for consumers; protection and enhancement of the integrity of the UK's financial system; and promotion of effective competition in the interest of consumers. We note that issues around fees such as management fees and transaction fees are not the only factor in assessing appropriate levels of transparency and investor protection.

Although the new rules are primarily concerned with authorised funds, the private equity and hedge fund industries should be cognisant of them as they illustrate the FCA's direction of travel in the industry more broadly.

While the New Rules and the proposals in the consultation paper are welcome, as always, the practical implementation and achieving the desired transparency and investor protection will be the real test for the FCA.

James Kaufmann is an expert in all aspects of investment funds. He is a dynamic Legal Director in RPC’s Corporate and Financial Services team, who focuses his practice on regulatory, hedge funds, retail funds, and adopts a holistic approach to advising investment fund management businesses. James advises investment fund clients on every part of their business, including establishment of managers and funds, fund/product formation, corporate and regulatory matters, and business life cycle events. He also has experience of a range of investment fund strategies and structures, including UCITS, open-ended onshore and offshore vehicles, closed-ended listed vehicles, structured products and managed accounts.

William L. Jones is a Senior Associate in RPC’s Corporate and Financial Service team. He advises fund managers and investors on the full spectrum of funds work, including the structuring and establishment of real estate, private equity and debt funds, fund restructurings, fund investments and secondaries transactions. He is also well versed in the regulatory and tax environment in which these funds operate.

For more information, please visit www.rpc.co.uk.