How to comply with Asset Management Market Study rules on clarity and benchmarks

Aug 16th '19

Last week (7 August), new FCA rules on clarity and benchmarks for fund managers came into force. The new rules are part of the regulator’s response to its Asset Management Market Study.


Here, we look at what fund managers need to do now, and how you can make sure you comply with the new rules.


What is the FCA’s Asset Management Market Study?

The regulator carried out an investigation into the UK’s asset management industry in 2015-16. An interim report on the findings was published in November 2016, with the final report published in June 2017.


The study set out a number of areas for improvement in the sector. It found:


  • That price competition was weak in a number of areas
  • That investors are not always clear on the objectives of funds
  • That fund performance is not always reported against an appropriate benchmark
  • Concerns about the way the investment consultant market operates

What has the FCA done as a result of the findings?

The regulator has taken several steps to tackle the issues it found in its research. New rules and guidance released in February focused on marketing materials and communications, as explored in this blog at the time.


Those changes aimed to help ‘consumers understand more about how their money is being managed, so that they can make better investment decisions’.


What are the new rules and how can fund managers meet their obligations?

As of 7 August, any funds authorised by the FCA have to follow the guidelines set out in the AMMS around clarity of objectives and the use of benchmarks. All client communications should have been reviewed against the new requirements to ensure they meet the standards needed.


What does this mean in practice for fund managers and their Compliance teams?

New rules on clarity have been put in place due to concern over a lack of clarity in statements of fund objectives and investment policies. Concern over the way benchmarks were used has led to new regulations on those.


New rules on fund management clarity

Publishing the final findings of the AMMS last year, the FCA said that it was ‘working towards providing greater clarity of fund objectives and performance reporting’.


It aims to make it easier for investors to select the most appropriate fund for their needs. This fits with wider regulatory work on suitability.


To meet this requirement for clarity, authorised fund managers need to:


  • Use consumer-friendly language to explain their fund performance
  • Write Key Information Documents and Key Investor Information Documents in a clear way, avoiding jargon and language that may not be understandable to retail investors (you can read producing user-friendly KIDs, here)
  • Include any ‘Relevant elements of the investment strategy’ in any descriptions of fund objectives and investment policy

Who do the new rules on clarity apply to?

The FCA’s new requirements are relevant to any managers of authorised funds that are subject to the Collective Investment Schemes (COLL) Handbook (for example, managers of UCITS, NURSs and QIS).


What are the new requirements around benchmarks?

In the words of the FCA, ‘Benchmarks are used in a wide range of markets to help set prices, measure performance, or work out amounts payable under financial contracts’.


There was concern that in the fund management industry, benchmarks were not providing the help to consumers that they should have done. As a result, three new benchmark categories have been created; a ‘target’ benchmark, a ‘constraint’ benchmark and a ‘comparator’ benchmark.


These were set out in the FCA’s February document, Asset Management Market Study – further remedies and are defined by law firm Eversheds Sutherland as:


  • A ‘target’– A benchmark used to define the fund’s target performance or to trigger a payment from scheme property (such as a performance fee).
  • A ‘constraint’ – A benchmark which constrains the composition of the portfolio.
  • A ‘comparator’ – A benchmark is used as performance comparator for the fund (these are probably referred to more widely in the industry as a ‘performance benchmark’).


While the clarity rules are pretty unambiguous, there has been some confusion over the benchmark rules. In an article on the new rules, compliance consultants Bovill cite particular confusion over: ‘whether, if you mention a benchmark as a reference for the performance of a group of assets, is that a comparator? For example, it is common to make a statement such as “our performance has been good due to our exposure to UK midcaps, which as measured by the FTSE 250 have risen X% over the period.” There is split opinion regarding whether the FTSE 250 is, in this context, a comparator.’


Bovill – while pointing out that there is no black-and-white regulatory answer to this currently – believe that ‘that there is a significant difference between the use of benchmarks used to invite performance comparisons and indices simply used to help explain performance’.


Compliance teams will need to seek their own advice and form their own decisions on how to tackle this issue of benchmarks.


What do you need to do as a result of the new rules?

Managers of FCA-authorised funds need to assess how they currently use benchmarks, referring to the new definitions we’ve outlined above. If a benchmark is implied, rather than explicitly stated, it still needs to be reviewed and to comply with the rules.


Then, once assessed, you need to ensure that you:


  • Explain why particular benchmarks are used (or how potential investors should assess fund performance, if benchmarks are not used)
  • Consistently reference any benchmarks used in all of your fund’s communications and documentation
  • If you refer to the fund’s past performance, this needs to be done against each ‘constraint’ benchmark
  • Review all your financial promotions and other fund documentation to ensure it complies with the new rules set out in the Conduct of Business sourcebook (COBS) 4.5 and the Collective Investment Schemes sourcebook (COLL) 4.2

Next steps for fund management Compliance teams

With the new rules already in force, if you haven’t taken the steps above to review your benchmarks, the clarity of your communications and your related financial promotions and materials, start now.


The FCA website has full rules on its final guidance.


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