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FCA finds fund managers’ value assessments improved but more work still needed

At a glance


  • On 10th August the FCA published the findings of its latest review of authorised fund managers’ (AFMs’) assessment of value (AoV) processes. The FCA found that, while many firms had significantly improved their AoV processes since its last review, there remain some significant shortcomings which firms need to address. These include independent non-executive directors (iNEDs) not providing sufficient challenge, and firms putting too much emphasis on comparable market rates to justify their fees rather than using the full range of assessment considerations.
  • Firms will need to carry out a line-by-line gap analysis against the review’s findings. In our view, it will be important for AFM Boards – including iNEDs - to read and understand the FCA’s findings in detail and to use them as a basis to challenge the business. We think AFM Boards need to be closely involved in the evolution of their firm’s AoV process following this review, rather than confining their role to approving near-final reports, and they need to ensure they have clear information about the assessment approach and the rationale for action or inaction on each fund to enable them to provide sufficient challenge.
  • Many of the examples of good practice set out in the FCA’s review will also be relevant for the price and value outcome under the Consumer Duty (‘the Duty’), which now applies to funds that are not subject to the COLL value assessment rules. So, firms should apply the learnings from this review to the rest of their fund range where relevant. Firms will also need to consider how to integrate Duty considerations into their COLL value assessment frameworks.


The FCA’s latest review of AFMs’ AoV processes found that, while many firms had significantly improved their AoV processes since its last review (see our blog), there remain some significant shortcomings. These include firms prioritising their own profitability over value for fund investors, insufficient challenge from iNEDs, some assessments not being supported with sufficient evidence, and AFM Boards deciding that fee levels were justified even though improved management information (MI) raised significant questions or countered that position. While many firms took remedial action when poor value was identified, including some reductions in fund fees and moving investors into ‘clean’ share classes with no trail commission, most remedial action did not involve cutting fees. Where fees were cut, this was almost always driven by adverse comparable market rates findings rather than other considerations, indicating continued price clustering.

In our view, it will be important for AFM Boards to read the FCA’s findings in detail and to use them to challenge the business. This includes challenging the robustness of the firm’s gap analysis against the review’s findings and taking a step back to consider the effectiveness of the AoV process against the outcomes the FCA is trying to achieve. iNEDs should probe the MI they receive and request further information where needed – one of the poor practices the FCA found was iNEDs thinking they could take information provided to the Board at face value.

Many of the review’s findings will also be relevant for the price and value outcome under the Duty, which applies to funds that are not subject to the COLL value assessment rules. Firms should therefore apply the learnings from this review to the rest of their fund range where relevant. Now that the Duty is in force, firms should also consider how their AoV processes meet the Duty’s requirements. While funds subject to COLL value assessments are exempt from the Duty’s price and value outcome, firms will still need to enhance their COLL value assessments to reflect the Duty’s cross-cutting rules, including consideration of customer vulnerability and foreseeable harm. For example, accessibility of product literature would be relevant to quality of service. Firms may also be able to leverage some of the additional data collected for the Duty to evidence value under COLL. We have set out further analysis on how firms can integrate Duty considerations into COLL value assessments here.


The FCA highlighted the importance of the AFM Board’s role in overseeing the AoV process. It found that tensions between a fund’s profitability for a firm and its value for fund investors appear to be influencing AoV outcomes. In addition, some AFM Boards told the FCA that fund fees were determined by more senior committees in their wider groups with AFMs having only limited influence. We think that to address these issues, iNEDs need to be well-equipped to challenge the business robustly. To achieve this, iNEDs need to have the right skills, experience and training, Boards need to be closely involved in the evolution of the AoV process rather than merely approving near-final reports, and they need to ensure they have clear information about the assessment approach and the rationale for action or inaction on each fund. In addition, AFM Boards need to ensure that senior committees within their wider group that have decision-making influence over fees and charges fully understand the AFM’s regulatory responsibilities in this area.

The FCA found that some firms had not fully integrated AoV into their business-as-usual processes for product development and fund governance. We think it is important for the AoV process to be viewed as a key input into decisions across the product lifecycle, not solely as an annual compliance exercise.


The FCA found some good practices, such as where performance thresholds reflected the fund’s investment strategy e.g. an actively managed fund assessed against a market comparator benchmark over the minimum holding period. However, it also found some poor practices, including firms using easily achieved capital growth targets despite the fund being actively managed and taking material market risk, and comparing multi-asset funds (MAFs) and funds of funds (FOFs) to other MAFs and FOFs rather than comparing to the markets to which their funds were primarily exposed.

In our view, it is important for each fund’s performance to be measured against a single metric. Where firms look at a range of performance metrics, it can be unclear what the fund is trying to achieve and whether it has performed well. This can be a particular issue for MAFs and FOFs, as it is less obvious which comparator benchmark should be used for these types of funds. Where possible, firms should establish a customised market-based benchmark (e.g. for MAFs, an approximate composite of indices based on the underlying asset classes). Where firms do compare performance against a publicly available wider peer group provided by the Investment Association or Morningstar risk categories, it is important that the peer group is reviewed for any obvious funds that are not comparable so that a more customised peer group reflects the fund’s investment strategy as far as possible. We have seen examples of firms using very broad peer groups which are not truly comparable.

Firms also need to ensure that they make a fair assessment of what constitutes good or poor performance. The FCA found that some firms used asymmetric performance metrics so that there was a low hurdle for good performance but a high hurdle for poor performance. Others moved funds to a good assessment score even where remedial steps taken had not yet improved performance over the fund’s holding period. In our view, if a firm has no or very few funds assessed as having poor performance, this should trigger increased scrutiny from the AFM Board.

AFM costs and economies of scale

The FCA found that firms with good AoV processes undertook detailed activity-based cost allocation at fund and share class levels. Other firms had not built a detailed costing model or were still allocating significant costs based on funds’ relative assets under management (AUM). In our view, developing a robust methodology underpinning the costing model is a pre-requisite to being able to assess AFM costs and economies of scale robustly. Firms that have not done this will need to engage with their fund accounting teams to build the capability to analyse the key cost components for each fund. Firms can use a range of data points and approaches to allocate costs to individual funds and inform the assessment of economies of scale. For example, we have seen clients using AUM, full time equivalent staff, timesheets, revenues, number of investors, the cost of IT applications etc. Third-party service providers can also be asked to provide fund-level cost breakdowns. We discuss some of the positive cost transparency trends in the financial services industry here.

The FCA found that, while many firms had been good at negotiating better prices with third-party managers or service providers as funds grew, the assessment of internal economies of scale was often underdeveloped and the benefits not systematically shared with fund investors. One way of passing on economies of scale in a transparent way is using a tiered fee model, and we have recently seen more firms using this approach.

Where firms reinvest economies of scale into the business, the FCA was concerned that the benefit was accruing to the firms or their general client base, rather than to investors in the funds where the largest economies were generated. Firms need to have carried out a clear analysis of which funds generate economies of scale, which products/services benefit from reinvestment into the business, at what point a new product/service is expected to become self-supporting, and at what point the fees for funds generating economies of scale should be reduced.

Comparable market rates

The FCA found that many firms used comparable market rates to over-ride one or more of the other minimum considerations, leading to inaction even if evidence from another consideration suggested that a fund’s fees might not be justified. The FCA’s seven considerations are intended to be assessed individually, with firms putting remedies in place if any of them show evidence of poor value. The FCA also does not consider market rates to represent competitive outcomes, so having fund fees that are comparable to competitors does not by itself demonstrate value.

When assessing comparable market rates, in our view it is important to ensure that the peer group is truly comparable, both in terms of charging structure and investment strategy. The FCA highlighted that some firms compared fund fees with those of other funds without adjusting for differences in service levels (e.g. platform fees). We have also seen examples of firms using very broad peer groups which are not representative of the fund’s investment strategy. We recommend that the customised peer group established for the performance assessment of a fund should also be used for the assessment of comparable market rates, where possible.

Quality of service

Good practices identified by the FCA included a meaningful assessment of fund manager expertise, the quality of the investment process and of service provision, and assessing third-party fund accountants and transfer agents using metrics to compare them with other providers. Poor practices included relying on attestations from delegated investment managers about their investment process and quality of operations, not considering the quality of services provided by affiliated companies, and using hygiene factors (e.g. low complaints and investment breaches) to justify positive service quality scores. In our view, external views on quality of service (e.g. third-party assessments and consumer surveys) can be a powerful way of assessing service quality, as long as surveys are carefully crafted so as to capture the customer’s actual experience of service quality and avoid positive bias. Quantitative information from internal assessments can also be informative.

With regards to ESG, the FCA found good practice where some firms did not apply positive ESG scores for funds that were not marketed as sustainable funds. This approach guards against giving credit for an ESG service level where it is in fact simply an extension of the existing investment process. In our view, firms should only give themselves credit for ESG factors where the fund has robust ESG credentials and is measured against an ESG benchmark. Given the complexities around ESG data and metrics, firms will need robust governance to mitigate the risk of inadvertent greenwashing. Our paper on greenwashing risks in asset management sets out more detail on this.

Comparable services

The FCA saw some good practices, including one firm plotting the fees paid by segregated mandate clients of different sizes to create a line of best fit and using this to compare the fees paid by different sized funds to identify significant divergence. However, there were also poorer practices, such as one firm concluding that lower fees for its asset management affiliate’s segregated mandate clients were due to discounts institutional clients had negotiated through their wider relationship with the affiliate, without quantifying the size of the discount or considering whether the AFM could negotiate a similar discount.

In our view, firms that have developed a robust cost allocation model can use this to quantify the higher costs for the firm to service a retail fund, and use this to assess whether the higher fees charged to fund investors are justified based on the higher cost of providing the service.

Published reports

The FCA found that most firms had significantly improved the quality of their reporting since its last review. With the introduction of the Duty, we expect these reports to receive more scrutiny from distributors. In view of this, firms will need to provide clear information on how they have reached their conclusions. We think it is good practice to provide quantitative information where possible, and to explain how any peer groups have been chosen.


Many firms still have material work to do to meet the FCA’s expectations, such as establishing correct comparators and developing their cost allocation methodology. AFM Boards need to ensure that they are providing robust challenge on their firm’s AoV methodology, using the improved MI to ensure they take action to improve value for fund investors where needed. AFM Boards should ensure that their firm carries out a detailed assessment of how they are meeting the FCA’s expectations and be closely involved in the evolution of their firm’s AoV process.