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FCA’s new value assessments are to be released

3rd February, 2020

The UK fund management industry has started to launch its new ‘value’ assessments. There have already been casualties and there may be more if, as the FCA hopes, these assessments take hold with investors. Will they help investors spot the next Woodford, or simply provide another regulatory hurdle?

• The FCA has said funds offered to retail investors in the UK do not consistently deliver good value

• The FCA found that the average profit margin for fund managers was 36% over a six-year period. Only real estate is higher.

• But would any of the current proposals for value assessments have uncovered Woodford?

The FCA is clear about the problem it wants to address. In a recent letter to asset management CEOs, it said: “Overall, standards of governance, particularly at the level of the regulated entity, generally fall below our expectations. Funds offered to retail investors in the UK do not consistently deliver good value.” No-one wants that school report.

It is easy to see where the industry may be falling down: in its asset management market study, the FCA found that the average profit margin for fund managers was 36% over a six-year period. That’s among the highest in the UK economy (only real estate is higher). Neil Woodford’s self-enrichment has done the industry no favours – reinforcing the view that managers get big bucks for raising assets rather than managing them well.

The problem is that a focus on profit margins and fund manager pay tends to lead to the natural conclusion that low-cost passive funds are the answer. This has certainly seemed to be the regulator’s conclusion at times. However, this leads to questions over price discovery in markets, plus sustainability considerations – do low-cost passive managers have the resources to monitor and enforce environmental, social and governance policies?

A recent report by Deloitte has said that the new value assessments should ‘focus on value, not just cost’: according to the FCA’s framework, firms will need to show that they are delivering economies of scale, quality of service and that their costs are in line with industry norms. Would any of this have uncovered Woodford? Perhaps the performance criteria might have identified weakness more recently, but would the value assessment have shown the liquidity weakness that was ultimately his undoing?

Independent non-executive directors are potentially a solution, but again, this hasn’t always proved a panacea for the investment trust sector. The board on Patient Capital were, unquestionably, late to act.

The worry is that firms may rely too heavily on data and providing standardised answers when investors are crying out for real insight. Can any industry really be expected to provide an honest appraisal of the value it provides? Who, in their right mind, would admit they do nothing of importance every day? The danger is that it ends up being an exercise in self-justification rather than providing help for investors. If it does, an important opportunity will have been lost.

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