Policy Statement
PS18/8
April 2018
Asset Management Market Study remedies and
changes to the handbook – Feedback and final
rules to CP17/18
2
PS18/8
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Th
is relates to
Consultation Paper 17/18 which is
available on our website at:
www.fca.org.uk/publications/
consultation/cp17-18.pdf
Please send any comments or
queries to:
Karen Northey
Strategy and Competition Division
Financial Conduct Authority
25 The North Colonnade
London
E14 5HS
Telephone:
020 7066 5350
Email:
cp17-1[email protected]rg.uk
Contents
1 Overview 3
2 Measures to improve fund governance 10
3 Moving fund investors to better value
share classes 23
4 Ensuring fairer treatment of dealing
prots 26
5 Discussion feedback: extending the
scope of our governance proposals to
other investment products 31
Annex 1
Listofnon-condentialrespondents 35
Annex 2
Commentaryonrisk-freeboxprotsrulesandguidance 38
Annex 3
Abbreviations used in this paper 41
Appendix 1
Made rules (legal instrument)
Appendix 2
Final non-Handbook Guidance
Appendix 3
An overview of all AMMS remedies
returns you to
the contents list
takes you to helpful
abbreviations
How to navigate this
document onscreen
3
PS18/8
Chapter 1
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
1 Overview
Introduction
1.1 In our Final Report to the Asset Management Market Study (AMMS)
1
, and the
preceding Interim Report, we set out evidence of weak price competition in a number
of areas of the asset management industry. This matters to millions of investors.
We estimate that over three quarters of the UK population are exposed to the asset
management sector either directly, or via their pensions. Given the number of people
impacted and that even small differences in charges can have a significant impact
on people’s savings over time, there is a significant amount of potential harm to be
addressed.
1.2 The policies (remedies) in this Policy Statement (PS) are an important part of a wider
package to improve competition in this industry for consumers. This PS follows
Consultation Paper (CP) 17/18 and sets out final rules and guidance. In CP17/18 we
consulted on changes to our rules and guidance for Authorised Fund Managers (AFMs),
including changes to their governance arrangements that focused on the duties they
have as the agents of the investors in their funds. This PS also feeds back on a related
proposal about how our changes work with the Senior Managers and Certification
Regime (SM&CR) discussed in CP17/18, but formally consulted on in CP17/25.
Who this aects
1.3 The new policy contained within this PS applies to UK AFMs in respect of their
management of authorised funds (that is, authorised open-ended collective
investment schemes).
1.4 This paper will be of interest to other firms in the investment management industry,
such as entities acting as delegated portfolio managers, the depositaries of authorised
funds and financial advisers. It will interest industry representative bodies.
1.5 The paper will be of interest to insurers running unit-linked and with-profits funds, as
well as to UK-listed investment trusts, in respect of our commentary on the potential
for the extension of the AMMS remedies covered in this PS to those sectors.
Is this of interest to consumers?
1.6 Investors in funds run by UK AFMs will be interested in this paper. This includes retail
investors, professional investors, advisers and their representatives.
1 https://www.fca.org.uk/publications/market-studies/asset-management-market-study
4
PS18/8
Chapter 1
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Context
1.7 We have identified several drivers of weak competition in a number of areas of the
asset management sector. Some investors are not well placed to find better value
for themselves, and can be relatively insensitive to the price of asset management
services. Such investors struggle to protect their own interests and through this to
drive competitive pressure on asset managers to deliver good products and services
at competitive prices. To help mitigate this, in CP17/18 we consulted on governance
remedies focussed on AFMs as agents of their underlying investors. The proposed
changes strengthened the duty on AFMs to act in the best interests of investors.
1.8 We consulted on rules requiring AFMs to pay any profits they may earn when dealing as
principal in the units of a dual-priced fund without putting their own capital at risk (so-
called ‘risk-free box profits’) back into the fund. We also consulted on changes to our
non-Handbook Guidance FG14/4, to make it easier for AFMs to move investors from
more expensive share classes to cheaper but otherwise identical classes.
1.9 The remedies set out in this PS are part of an overall package.
2
We are also publishing
a CP with proposals to improve clarity over what a fund is offering (what it aims to
do, how it intends to do it, and how performance is shown) as we believe that a lack
of clarity is another reason for weak competition. The proposals aim to help those
investors, and their advisers, who are able to make use of better information to choose
the right funds. This incorporates the work of our fund objectives working group. The
group included a wide range of stakeholders including asset management firms and
investor groups. We are grateful for the time and expert input of this group.
1.10 Taken together, our remedies seek to address both demand and supply side
problems in the asset management market which, if addressed, should lead to greater
competition and innovation in this market in the interests of the consumers it serves.
1.11 The AMMS also highlighted the importance of clear disclosure of what asset
management services cost through the presentation of a ‘single charge’. The recast
Markets in Financial Instruments Directive (MiFID II) and the Packaged Retail and
Insurance based Investment Products Regulation (PRIIPs) have recently introduced
greater disclosure of all costs and charges, including transaction costs. Consumers
should now see the full costs and charges, expressed as a single fee, for most
transactions in investment products, and on an ongoing basis. This is a significant
step forward, but how the new information is presented will be important if it is to help
consumers make more informed choices. To better understand this we conducted
behavioural testing. We have published the results of the testing alongside this PS in
an Occasional Paper.
3
The findings are consistent with a significant body of previous
work. Firms should consider the results when thinking about how their disclosures are
working.
1.12 In response to other concerns highlighted by the AMMS, we are supporting an
independent Institutional Disclosure Working Group (IDWG). The group is seeking to
agree a disclosure framework to support consistent disclosure of costs and charges to
institutional investors.
2 See Appendix 3 (graphic of remedies)
3 www.fca.org.uk/publication/occasional-papers/occasional-paper-32.pdf
5
PS18/8
Chapter 1
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
1.13 We have also referred the investment consultancy market to the Competition and
Markets Authority for a market investigation.
4
That investigation is now under way.
Summary of feedback and our response
Our governance proposals (Chapter 2)
Strengthening the duty of AFMs to act in the best interest of their investors – our
Value for Money proposal
1.14 There is an existing duty on AFMs to act in the best interests of fund investors.
5
In
our view, as part of fulfilling this duty, AFMs should assess and justify to their fund
investors the charges taken from the funds they manage in the context of the overall
service and value provided. We believe this is important as AFMs are the agents of the
investors in their funds; they are not just product providers. In CP17/18 we called this
a consideration of ‘value for money’ (VfM). We have found that AFMs generally do not
consider robustly whether they are delivering VfM, despite their existing obligations.
1.15 For many retail and institutional investors, making informed investment decisions
can be hard. To protect those investors that are not well placed to find better value
themselves, we consulted on proposals to strengthen and clarify AFMs’ duty to act
in the best interests of fund investors. Specifically, we said that they must assess the
VfM of each fund against a non-exhaustive list of prescribed elements, conclude that
each fund offers good VfM or take corrective action if it does not, and explain the
assessment annually in a report made available to the public.
1.16 On balance, stakeholders supported what we were trying to achieve with our
proposals, agreeing that value is at the heart of the asset management proposition.
However, many stakeholders expressed concerns with our drafting. A key concern
was that our draft rules appeared unduly focused on assessing charges from the
starting point of AFMs’ costs, rather than the overall value an individual fund provides.
Other stakeholders wanted us to be clearer on what we meant by ‘value for money’
in this specific context. Most stakeholders wanted us to extend the proposed
implementation period for these rules, given other pressures on the sector in the short
term.
1.17 We have considered the feedback carefully and still believe that the core of our policy
is correct – that agents should be accountable to their underlying beneficiaries on
how they deliver value. We accept that our draft rules could be seen as too focused on
AFMs’ costs rather than the full value proposition of funds, which was not our intention.
We have redrafted our final rules to clarify that fund charges should be assessed in the
context of the overall value delivered, rather than using the term ‘value for money’. We
have also decided to extend the implementation period for this requirement from 12 to
18 months.
Independent Directors
1.18 AFM boards must balance the interests of their fund investors and shareholders.
The market study suggests that this balance is not always being struck appropriately,
4 https://www.fca.org.uk/publications/market-studies/asset-management-market-study-final-decision-mir
5 See COLL 6.6A.2R and COBS 2.1.4R.
6
PS18/8
Chapter 1
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
and we believe this is in part due to the fact that AFM boards are generally staffed
exclusively by executives of the firm. To rebalance this and to help make sure that the
best interests of investors are subject to greater scrutiny and challenge, we proposed
rules requiring AFMs to appoint independent directors to their board. We proposed
that AFMs appoint a minimum of two independent directors and for them to comprise
at least 25% of the total board membership.
1.19 The overall response to our proposal was supportive. However, there were concerns
about the costs for AFMs with smaller businesses, and whether these costs could
create disproportionate barriers to entry for start-ups. We received responses
asking us to introduce a threshold below which an AFM would not be required to
have independent directors. Most stakeholders wanted us to extend the proposed
implementation period for this requirement, given other pressures on the sector in the
short term.
1.20 We think that the introduction of independent members to AFM boards will lead
to better outcomes for investors, so we have made final rules introducing this
requirement as consulted on. We think the benefits of independent scrutiny should be
enjoyed by all investors, irrespective of the size of the business of the AFM running the
fund they have invested in, and irrespective of how long the AFM has been operating.
1.21 We recognise that the requirement introduces costs, but believe that overall these
are proportionate to the benefits we expect independent directors will bring to the
running of funds. We believe that these costs are justified even in the early years of
start-up AFMs, as the challenge independent directors bring is particularly important
in a firm’s formative years when its strategy and culture are set. As set out in CP17/18,
we believe that all investors should benefit from the introduction of independent
directors. However, we have extended the implementation period for this requirement
from 12 to 18 months.
SM&CR
1.22 In CP17/18, we stated that we would consult on a new specific Prescribed
Responsibility (PR) for AFMs, as part of the extension of the SM&CR to almost all
financial services firms. This PR would make clear that a Senior Manager, usually the
chair of the board of an AFM, must take reasonable steps to ensure that the firm
complies with its obligation to carry out the assessment of value, the duty to recruit
independent directors, and the duty to act in the best interests of fund investors. We
consulted on the detail of this specific PR for AFMs in CP17/25.
1.23 In CP17/18, we noted that there are benefits to appointing either an executive or
independent member of the board to the position of chair and consulted on rules that
would allow an AFM board to make this decision itself.
1.24 The vast majority of respondents agreed with our proposals. A small minority did
not think that we should bring in a specific PR for AFMs, and others focussed on
the independence of the chair, suggesting that chairs of AFM boards should be
independent.
1.25 After considering the feedback, we have decided to introduce the PR for AFMs as part
of the extension of the SM&CR. We also continue to believe that AFMs should decide
for themselves whether to appoint an independent director as chair or not. We intend
to publish the rest of our final rules for the extension of the SM&CR later this year.
7
PS18/8
Chapter 1
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Share classes (Chapter 3)
1.26 In CP17/18 we consulted on changes to our guidance to make it easier for fund
investors to be moved (converted) to cheaper but otherwise identical classes of the
same fund. The main change was to remove the need for an AFM to get consent from
each investor before converting them.
6
1.27 All respondents supported our aim of making it easier to move investors to cheaper
classes. There was a lot of support for removing the need for an AFM to get individual
consent from every investor before conversion. However, a significant number of
respondents said that the open-ended notification requirements we consulted on
were still too onerous and therefore likely to continue to prevent AFMs carrying out
class conversions in practice.
1.28 We have published final recast guidance which removes the need for the AFM to get
individual consent from each investor before converting them. The recast guidance
now recommends AFMs make a simple, one-off notification to investors, which does
not require a response, a minimum of 60 days before a mandatory conversion.
Trail commission
1.29 CP17/18 asked questions for discussion about whether we should continue to allow
the payment of trail commission. We received a range of feedback on both sides of the
debate. We are grateful to respondents for sending us their views, which will inform our
wider consideration of trail commission. We are still considering the issue and have no
immediate plans to bring forward proposals for policy change at this point.
Box prots (Chapter 4)
1.30 We found that the managers of some dual-priced authorised funds were making a risk-
free profit when dealing as principal in the units of their funds. In CP17/18 we proposed
that these profits should be repaid to the fund, for the benefit of investors. Most
respondents agreed with this. However, some, especially those directly involved in
managing and administering authorised funds, were concerned about the practicalities
of implementing our proposal as drafted and its possible unintended consequences.
1.31 We welcome the broad support for our proposal and have proceeded with it while
making some adjustments to correct technical shortcomings in the draft rules and
guidance. We are also allowing some flexibility in how risk-free profits should be
allocated fairly and in the interests of investors. We are grateful to stakeholders for
their technical input to the drafting.
Extending the scope of our governance proposals to other investment products -
discussion (Chapter 5)
1.32 In CP17/18 we asked for views on extending our governance proposals for the
authorised funds market to other investment products, specifically to unit-linked and
with-profits insurance products and investment trusts (also referred to as investment
companies). We said that we did not plan to extend the governance proposals to
pensions, as we would instead consider this as part of our work on non-workplace
pensions.
7
The feedback we received was mixed.
6 We proposed to retain within the guidance a recommendation that AFMs should check that any mandatory conversion will be
consistent with investors’ best interests.
7 We have published a Discussion Paper on this topic:
https://www.fca.org.uk/publications/discussion-papers/effective-competition-non-workplace-pensions-dp18-1
8
PS18/8
Chapter 1
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
1.33 We have planned diagnostic work into with-profits and unit-linked products that will
improve our view of any harm that exists in these markets. We expect to reach a view
on whether further intervention is required in the first half of 2019. We are keeping the
possibility of further changes to investment trust governance arrangements under
review, but we do not plan any immediate action on this.
8
Consistent with CP17/18, we
are not bringing forward proposals on extending the governance proposals to pensions
at this time.
Summary of nal decisions on the CP17/18 remedies – table
CP17/18 consultation points Decision
Value for Money assessments and reporting Remedyintroducedasnalrulesandguidance,
with some changes including change of
implementation date
Independent Directors – 25% and a minimum of two Remedyintroducedasnalrulesandguidance,
with some minor changes including change of
implementation date
SM&CR PR for AFMs (as consulted on in CP 17/25) To be implemented as per consultation, as part
of the wider extension of the SM&CR
BoxProts Remedyintroducedasnalrulesandguidance,
with some technical changes and change of
implementation date
Share Classes Changeintroducedasnalguidance,withsome
minor drafting changes
CP17/18 consultation points Direction of travel
Adjacent markets Diagnosticworkintowith-protsandunit-
linked products planned. No immediate action
planned on changes to investment trust
governance arrangements.
Trail Commission No immediate plans to bring forward policy
change on this.
Equality and diversity considerations
1.34 We have considered the equality and diversity issues that may arise from our
proposals. Overall, we do not consider that the proposals adversely impact any of the
groups with protected characteristics under the Equality Act 2010. We did not receive
any feedback contradicting this conclusion.
8 Investment trusts are corporations. Directors have responsibilities to their corporation’s shareholders under company law.
In addition, investment trusts are subject to Chapter 15 of our Listing Rules. One of the requirements under these rules is a
requirement for investment trust boards to have a majority of independent directors.
9
PS18/8
Chapter 1
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Next steps
1.35 AFMs should take note of the implementation dates of our final policies:
• nalrulesforourgovernanceremedies–requiringAFMstoassesswhether
theiroeringisinlinewiththeirneedtoactinbestinterestofinvestors,andthe
independentdirectorsrequirements–willcomeintoeecton30September2019
• ournalrulesfortheSM&CRPRforAFMswillcomeintoeectatthesametimeas
the rules for the extension of the SM&CR in general, which is expected to be in mid
to late 2019
• ourrulesonboxprotswillcomeintoeecton1April2019
• our recast of Final Guidance 14/4, now known as Final Guidance 18/3, will be
eectivefromthedateofthispublication
10
PS18/8
Chapter 2
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
2 Measures to improve fund governance
2.1 In this chapter we summarise the feedback received and provide our response on our
CP17/18 proposals to:
• strengthen and clarify the duty of AFMs to act in the best interests of their investors
andtoprovideforgreaterscrutinyofhowAFMsarefulllingthisrequirement
through an annual report
• increase the level of scrutiny at AFM board level
9
by mandating a minimum number
of independent directors
• clarify the accountability of the chairs of AFM boards in relation to these proposals
2.2 These remedies focus on AFMs’ duties as the agents of the investors in their funds,
and are intended to better protect investors who are less able to exert demand side
pressure and find value themselves. As set out in CP17/18 we found, as part of the
market study, that retail investors do not usually negotiate with asset managers and
that fund governance bodies acting on their behalf do not typically focus on value
for money. We received 106 responses from a range of stakeholders, including large
and small asset managers, consumer groups, individuals and other financial market
participants.
Strengthening our rules for AFMs to act in the best interest of their
investors
2.3 There is an existing duty on AFMs to act in the best interests of fund investors. This
derives in part from requirements of the Undertakings for Collective Investment in
Transferable Securities (UCITS) and the Alternative Investment Fund Managers (AIFM)
Directives. In our view, as part of fulfilling this duty, AFMs should consider whether the
charges taken from a fund are justified in the context of the overall service and value
they provide through that fund. This includes both charges that are usually paid directly
to third parties
10
and the management fees that AFMs set for themselves. We believe
this is particularly important as AFMs are the agents of their investors – they act on
their behalf and owe them duties – they are not solely product providers. In CP17/18 we
called this a consideration of ‘value for money’ (VfM).
2.4 We have found that AFM boards generally do not consider robustly whether they
are delivering VfM to their investors. In response to this we consulted on proposals
to strengthen and clarify AFMs’ duty to act in the best interests of their investors.
Specifically, that as part of this duty they would be required to:
• assess the VfM of each fund against a non-exhaustive list of prescribed elements,
including whether charges are reasonable in relation to the costs incurred in
delivering the service, and the quality of the service provided
9 As explained below, our rules use the broader term ‘governing body of an AFM’. Our use of the term ‘board’ in this PS should be read
as referring to the governing body of an AFM.
10 E.g. depositary fees, audit fees.
11
PS18/8
Chapter 2
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
• concludethateachfundoersgoodVfMortakecorrectiveactionifitdoesnot
• explain the assessment annually in a report made available to the public.
2.5 Our proposal would require AFMs, as agents, to be more transparent in the decisions
they are taking while managing other people’s money. As set out in paragraph 3.31 of
CP17/18, the intention was to encourage AFMs to offer better VfM as a result of the
VfM assessments they carry out, or the consumer pressure from market commentary
on their published reports - e.g. from the press and platforms - or both.
2.6 In CP17/18, we asked:
Q1: Do you agree that we should introduce a specic rule
requiring AFM boards to assess value for money?
Q2: Do you agree with the specic requirements of the
assessment? If not, what additional or alternative elements
should be included?
Q3: Do you agree with the planned implementation period of
12 months? If not, what alternative timeframe would you
suggest?
Q4: Do you agree with the proposed requirement for the AFM to
publish a report on the ndings of the assessment and the
steps taken?
Feedback received
2.7 Most respondents supported our intention. There was broad support for our view
that value is at the heart of the asset management proposition and that, as agents,
fund managers owe duties to their underlying beneficiaries, the investors in the fund.
Only a minority of respondents felt we should not introduce an obligatory assessment
of value at all. A few argued that it was already inherent in the need to act in the best
interests of fund investors so was unnecessary, or should be expressed as guidance.
One respondent said we should not impose a value assessment duty on AFMs without
having first considered the whole value chain including intermediation.
2.8 However, many stakeholders expressed concerns about the drafting of the proposed
rule and asked us to clarify our expectations in practice. A key concern was that the
draft rule appeared unduly focused on assessing fund charges from the starting point
of AFMs’ costs, rather than the overall value provided including quality of service,
performance and the potential to deliver value in the future. Some respondents
were concerned about the use of the term ‘value for money’ and specifying what
they felt was a fundamentally subjective judgement in rules. Industry respondents
were concerned that the drafting could give investors the impression that the lowest
charges always provide the best value and that “cheapest was always best”.
2.9 Many respondents made suggestions for changing the assessment criteria, in
emphasis and detail. A few suggested adopting an approach based on the United
12
PS18/8
Chapter 2
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
States model, including the Gartenberg principles
11
, instead. They said this model put
a consideration of fund charges in the context of the overall fund management service
provided. Several respondents thought that the assessment (and the reporting rules),
should take into account each fund’s objectives and the fact that most funds are
medium to long-term investments. Many said that the performance of a fund should
be an assessment criterion. A few respondents incorrectly thought that our draft
rules meant the assessment should be solely based on past performance, something
they said they did not support. Several mentioned the incoming product governance
rules under MiFID II, and suggested incorporating those into the assessment. One
respondent said that for ethical funds the assessment should include provisions on the
trade-off between ethical policy and investment performance.
2.10 Several respondents asked for clarification on whether identified savings achieved
through economies of scale should be passed on to investors.
2.11 Several respondents commented on how breakpoints were referenced in the draft
rule. They acknowledged that breakpoints could be helpful, but argued that these
should not be the only fees mechanism that could be considered. Other respondents
felt we had underestimated the differences in the cost bases for running retail funds
compared to institutional ones and should not assume the savings would be the same
as funds grew.
Feedback on annual reporting about assessments
2.12 Several respondents argued that an annual report of the value for money assessment
was misguided, as funds were usually medium to long term investments, and
investment strategies with a long term view might underperform in the short term.
Several respondents said that reporting should be based on the holding period of a
fund, rather than annually.
2.13 A few respondents were concerned that public reporting on the value for money
assessment will force them to disclose commercially sensitive information and might
be anticompetitive.
2.14 Two respondents suggested that the annual report could be based on the format of an
Independent Governance Committee's (IGC's) reporting on value for money.
Feedback on the implementation period
2.15 A few respondents stated that they had no objections to the proposed
implementation period of 12 months, and one respondent suggested we should
shorten it to 3 months. However, the vast majority of industry respondents asked
for more time, because of the need to prepare their businesses for other incoming
political and regulatory changes, with most requests for an extended period ranging
from 18 to 36 months. Some respondents asked for the implementation period to be
aligned with that of the SM&CR.
11 The widely accepted Gartenberg principles derive from United States case law. They relate to what points the board of an US
mutual fund should have regard to, when, as required by Section 15 of the 1940 Investment Company Act, it is assessing the fund
management contract (which will of course include the fee). The points are as follows:
1. the nature, extent, and quality of the services to be provided by the fund manager;
2. the investment performance of the fund and the fund manager;
3. the costs of the services to be provided and profits to be realized by the fund manager and its affiliates;
4. the extent to which economies of scale would be realized as the fund grows; and
5. the extent to which fee levels reflect these economies of scale for the benefit of fund investors.
13
PS18/8
Chapter 2
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Our response
Overall
The AMMS and our supervisory work have shown that in general, AFMs
havenotconsideredrobustlythevaluetheyoertoinvestorsunderour
existing rules. We believe that this is leading to harm to investors through
poor value products.
Withthesendings,andhavingtakenaccountofthefeedback,we
consider that the core of our policy is correct – that agents should be
accountable to their underlying clients on how they deliver value. We
havedecidedtomakenalrulesinCOLLtoconrmourexpectationthat
part of acting in the best interests of investors involves AFMs assessing
whether (and demonstrating that) value is being delivered for investors.
We consider that rules rather than guidance will enforce a level playing-
eld,asallAFMswillhavetocarryouttheassessmentandpublishan
annual statement describing it, aiding comparison across the sector.
However,wehaveamendedthenalrulestotakeaccountofthe
feedback we received, as we set out below.
Commentary on our amended nal rules including the reporting
requirement
We have considered the feedback on the term ‘value for money’, with the
callsforustoclarifywhatweexpectofAFMs.Wehavechangedthenal
rules to clarify the detail of the assessment we require AFMs to carry out,
and the judgements we expect them to make.
We accept that our draft rules could be seen to be too focused on AFMs’
costs rather than the full value proposition of funds, which was not our
intention. We have redrafted COLL 6.6.20R to clarify that fund charges
should be assessed in the context of the overall service delivered. The
nalruleisclosertothe‘Gartenbergprinciples’intheU.S.(seefootnote
11aboveformoredetailaboutthem).Wehaverenedthenon-
exhaustive list of elements prescribed for the assessment in the table in
COLL 6.6.21R. This table retains the quality of services provided and we
have added guidance that this could include, for example, the quality of
the AFM’s internal investment process.
The table also now explicitly includes fund performance. Our redrafting
clariesthatAFMscanassessperformanceoveratimeperiod
appropriate to the fund’s investment objective, policy and strategy. We
conrmthattheassessmentcanassesspastandreasonablyexpected
future performance and should not be solely based on actual past
performance, short term or otherwise.
A consideration of AFMs’ costs, and of economies of scale, remains part
of the assessment. We clarify that a comparison of fund charges with
charges levied on similar strategies delivered by the AFM through other
services, including segregated mandates, is also a prescribed element
within the assessment, if applicable. The AFM must also consider market
rates for comparable services, whether the AFM provides the service
itself or receives it from another supplier.
14
PS18/8
Chapter 2
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
We accept feedback that our draft rules’ focus on breakpoints was too
detailed and prescriptive, as there are many ways AFMs could choose
tooermorevaluetofundinvestors.Wehaveremovedthedirect
referencetobreakpointsfromthenalrules.AFMsremainableto
consider additional elements as part of their assessment, and report on
these,butwehaveclariedthatwheretheydothis,theymustsetout
the basis on which these additional elements have been considered. The
list of elements sets a minimum basis for the assessment, but it does
not constrain the exercise of judgement by AFMs on other elements
oftheirservicethatarerelevant,orinhibitinnovationintheiroeringto
investors.
The provision to consider economies of scale does not prevent AFMs
from, for example, reinvesting savings achieved through economies
of scale into the business, subsidising other parts of the business or
coveringdevelopmentcosts.However,rmswillhavetoexplainthese
decisions in the annual report and show how these decisions, along
withothersowingfromtheassessment,areinthebestinterestofthe
investors.
An annual, public statement describing the assessment conducted by
the AFM is an important part of our package and helps with transparency
and scrutiny of these assessments across the industry. As set out
above,weareprovidingforaconsiderationofperformancethatreects
the timescale over which a fund will try to achieve its objectives. AFMs
canreectthisintheirannualstatements.AFMscanexplainwhytheir
fund is currently underperforming if they think it will help investors
to understand their strategy. It would not make sense to require
statements to be published in line with the recommended holding period
of a fund – which could be years – as people invest in funds on a rolling
basis, and often for shorter periods than the recommended holding
period.Reportingsoinfrequentlywouldsignicantlyreducetheimpact
of this policy.
AFMs can explain in their annual statement why retail funds and
institutional mandates are not comparable, if the AFM believes this to
bethecase.Wedonotexpectrmstodiscloseinformationwhichis
commerciallysensitiveoranticompetitive.Ourproposalsdonotaect
existing competition law, which continues to apply.
For a fund set up as an umbrella, the value assessment will take place on
a sub-fund-by-sub-fund basis. The statement setting out a description
of the assessment of value will need to describe each sub-fund
individually.
AFMs can choose the way they communicate quantitative and qualitative
information, but they must comply with our rules for communications to
be fair, clear and not misleading.
15
PS18/8
Chapter 2
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Implementation period
Considering the weight of the feedback in the context of other pressures
on the sector, we have extended the implementation period for this
requirement.Insteadofcomingintoeect12monthsfromthedateof
publicationofthisPolicyStatement,theseruleswillnowcomeintoeect
approximately 18 months from that date on 30 September 2019.
AFMs must publish a statement setting out a description of the
assessment of value, either in the fund’s annual report or in a separate
composite report. In either case, the statement must be published
within4monthsoftheendoftherelevantannualaccountingperiod.
We have added a transitional rule so that a statement setting out a
description of the assessment of value is not required for an annual
accounting period that ends before 30 September 2019.
Independent directors on AFM boards
2.16 AFM boards must balance the interests of their investors and shareholders. The
market study suggests that this balance is not always being struck appropriately,
and we believe this is in part due to the fact that AFM boards are generally staffed
exclusively by executives of the firm. To rebalance this and help to make sure that what
is in the best interests of investors is subject to greater scrutiny and challenge, we
proposed that AFMs appoint a minimum of two independent directors and for them to
comprise at least 25% of the total board membership.
2.17 We proposed that independent directors can serve for no more than ten years at once,
and that directors may not be eligible for reappointment to the same AFM until five
years from the end of their last term. We did not consider it necessary to propose a
limit on the number of AFM boards an independent director can serve on. They would
need to have enough experience and expertise to fulfil their role, but financial services
expertise is not compulsory.
2.18 To qualify to serve as an independent director, people can’t have been paid by the AFM
group for five years before their appointment, or had a material business relationship
with it for the last three years.
2.19 In CP17/18, we proposed not to introduce a minimum threshold for smaller firms to
comply with the requirements to appoint independent directors. We considered that
all investors should benefit, regardless of the size of the fund or the AFM running it.
Finally, we proposed an implementation period of 12 months following the finalisation
of these rules.
2.20 In CP17/18, we asked:
Q5: Do you agree with our proposal to require AFMs to
appoint independent directors to the board? If not, what
alternative(s) would you propose?
Q6: Do you agree with the proposed proportion of independent
directors (at least two and not less than 25% by number)?
16
PS18/8
Chapter 2
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Q7: Do you agree with our approach that independent directors
may serve on more than one board, provided that they
comply with existing rules? If not, do you think a ban on
serving on more than one board is necessary?
Q8: Do you agree with the proposed requirements for being
an independent director? If not, what alternatives do you
propose?
Q9: Do you agree with an implementation period of 12 months?
If not, how much time do you think AFMs will need to
appoint suitable independent directors?
Feedback received
2.21 The overall response to our proposal was supportive. However, there were concerns
about the costs for AFMs with smaller businesses, and whether these could create
disproportionate barriers to entry for start-ups. We received responses asking us
to introduce a threshold below which an AFM would not need to have independent
directors.
2.22 One respondent said that AFMs should only appoint independent directors where it
would clearly enhance the effectiveness of the board and that a minimum number of
independent directors should not be set by rules. Another respondent stated that they
do not believe independent directors will bring any improvement in the value for money
delivered to clients. They said that the industry should focus on a fee model that better
aligns the interests of investors and clients.
2.23 The remaining feedback focussed on points of detail and requests for us to clarify how
the rules will work in practice. Some respondents wanted to know how the requirement
to appoint independent directors to AFMs would affect legal structures other than
corporations. One respondent asked us to enhance the procedures and protections
around how independent directors can have their employment terminated, to give
them the confidence to provide challenge. They asked for independent directors to
be protected under the Financial Conduct Authority (FCA) whistle-blowing provisions
among other protections and were concerned that without these measures,
“independent” directors might become more easily “captured” by the AFM.
2.24 Several respondents asked for further clarification on how the obligation to assess
value delivered for fund investors sat with the general duties of directors, including
their need to consider their shareholders. They also asked if, as suggested in draft
COLL 6.6.26G (4) (guidance that relates to COLL 6.2.5R (6)), an AFM could be required
to act “solely” in the interest of investors.
2.25 Two respondents stated that, while they agreed with the proposal for 25% of directors
to be independent, they were against the requirement to appoint at least two. Two
other respondents argued that boards should have majority independence, as this
would be more effective and be consistent with IGCs and the corporate governance
code, which states that at least 50% of directors should be independent (excluding the
chair). One respondent suggested increasing the requirement from 25% to one third of
the board.
17
PS18/8
Chapter 2
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
2.26 Several respondents were concerned about our proposal to allow independent
directors to serve on more than one board, because of concerns about professional
secrecy and conflicts of interests. One respondent asked us to limit the number
of AFM boards an individual can serve on at the same time, as they said ‘full-time’
independent directors might be less likely to “rock the boat”. One respondent agreed
that we should not impose a limit but asked us to keep this provision under periodic
review. Two respondents asked if an independent director could serve on multiple AFM
boards for the same asset management entity or group. Another respondent asked
whether a consultant appointed on a third party contract for a limited amount of time
within the five years could still be considered independent.
2.27 Many respondents were concerned about the limitations imposed by the
independence requirements arguing that this would make it difficult to find suitable
candidates. One said that restrictions on prior employees should be limited to those
who worked on the relevant fund range.
2.28 A few respondents were concerned about the experience required for independent
directors. One argued that independent directors should have financial services
experience so they can provide sufficient input. Another suggested that expertise
and experience in other areas of financial services was not always transferable to fund
management.
2.29 One respondent asked us to also consider personal, family or business relationships
with other directors, as this could compromise independence.
2.30 Another respondent said that independent directors should not be allowed to serve for
longer than 3-6 years as this could compromise their independence. One respondent
suggested that directors should be considered as potentially independent two years
after previous dealings with the AFM, rather than the proposed five.
2.31 Many respondents were concerned about the proposed implementation period of 12
months, given the impact of other regulatory changes and the challenges of preparing
for Brexit. Suggestions for an extension ranged from 18 to 36 months.
Our response
Noting the broadly positive feedback, and because we consider that
theintroductionofindependentmemberstoAFMboardswillbenet
investors,wehavemadenalrulesintroducingthisrequirementas
consulted on, except for some minor adjustments.
Wethinkallinvestorsshouldbenetfromindependentscrutinyno
matter how large the AFM is and how long it has been operating. We
recognise that this will cost money, but believe that this is proportionate
tothebenetsweexpectindependentdirectorstobring.Webelieve
thatthecostisjustiedevenintheearlyyearsofstart-upAFMs,as
independentdirectors’perspectivesareparticularlyimportantinarm’s
formative years during which, for example, its strategy and culture are
set.
We have also considered whether there should be a minimum value of
assets under management (AUM) before the requirement applies. There
18
PS18/8
Chapter 2
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
are a number of practical challenges in applying that approach but more
importantly,webelieveitisimportantthatallinvestorsbenetfromthe
improved challenge independent directors can bring and they are not put
in the position of having to determine whether a particular AFM is subject
to this rule. We have decided to apply the requirement for independent
directors to all AFMs.
Because our rule refers to the ‘governing body’ of the AFM, it is suitable
for any legal entity that can become an AFM, so all our requirements will
apply equally to every AFM.
SpecicwhistleblowingprovisionsderivedfromEuropeanlegislation,
such as the UCITS Directive and MiFID II, will apply to many AFMs. The
Public Interest Disclosure Act 1998 and its provisions apply to essentially
allUKrms.ThemajorityofprovisionsinSYSC18willnotapplyto
AFMs,butitisforrmstoconsidertheappropriatearrangementsin
lightoftheirstructureandbusinessmodel.Firmsmayndithelpfulto
considerSYSC18whendeterminingthemeasuresappropriatetotheir
circumstances.
In our SM&CR consultation paper (CP17/25) we consulted on the
application of Senior Manager Conduct Rule 4 (SC4 – COCON 2.2.4R)
to Non-Executive Directors (NEDs) even where they do not require
FCA approval to carry out their roles (this category will include the
independent directors considered in this chapter). These rules have not
yetbeennalised,buttheapplicationofSC4toallNEDswouldimpose
a requirement for NEDs to disclose any information to the FCA of which
we could reasonably expect notice. This may include any relevant reports
by whistle blowers. All Senior Manager Conduct Rules would apply to
individuals approved for Senior Management Functions, such as the
chair.
We don’t think the need to act in the best interests of fund investors
conictswithdirectors’generalduties.Thesedutiesarenotlimitedto
shareholdersornancialsuccessalone.Independentdirectorswillbring
an external perspective and support executive directors. We accept the
concerns expressed regarding the word “solely” in COLL 6.6.26G (4) and
havedeleteditfromthenalguidance.
We have considered arguments for and against going further on board
independence. We have concluded that the proposal we consulted
on is the most proportionate approach. AFMs may choose to appoint
additional directors if this is right for their business.
We will monitor the success of the proposal, and will consider introducing
a higher threshold of independence, including a requirement to have
a majority independent board, at a later stage if needed. We have
considered respondents’ concerns about independent directors
attendingmultipleboards,acrossdierentcommercialgroups,andwe
recognisethatlegitimateconcernswillexistaboutcondentialityand
otherconictsofinterest.Theseconsiderationsmaymeanthatitdoes
not become common practice for independent directors to serve on
theAFMboardsofdierentgroups.However,weconsiderthatitshould
19
PS18/8
Chapter 2
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
be up to AFMs to decide if they accept independent directors who also
serve on other boards. We will monitor this situation.
Independent directors can sit on more than one AFM within a group
underournalrules.However,thetimeservedwillbecalculatedona
groupbasis.Anindependentdirectorcanserveatermofuptoveyears
(renewed once to a maximum of ten years) within one group, starting
fromthetimeoftherstappointment.Wehavealsoclariedinournal
rules that a director, having already started to serve on the board of one
AFM within a group, is not prevented from serving on another board
within the same group, as long as the overall time limits are not breached.
OurnalrulesclarifythatAFMswhichalreadyhaveindependent
directors, prior to the implementation date of these rules, can keep them
on their boards as long as they meet the independence requirements
set out in COLL 6.6.25 R
12
. Once the rules come into force, existing
independentdirectorscanserveforamaximumtermofveyears
(renewed once to a maximum of ten years) – the clock starts on the date
therulescomeintoeect.
The FCA will not play any part in the recruitment process, nor will we
approve candidates.
Wedon’tthinkthatAFMswillstruggletondsuitableindependent
directors. Feedback from the investment trust sector, which already
requires a majority independent board, suggests that there is a pool
ofcapable,nanciallyliteratecandidates.WeencourageAFMstolook
outside the pool of usual candidates in their search for independent
directors. Amongst others, we would point towards the Investment
Association’srecentlylaunchedve-yearinitiativetoincreasediversity
in the boardroom. This calls for greater diversity across a range of
dimensions: gender, ethnicity, socio-economic background, LGBTI+, age
and disability.
A criterion of independence is that there should be no monetary link
to the entire company, which would not be achieved by limiting these
restrictions to former employees of the fund range only. We have not
changed our approach on this.
We agree that a person with a close relative employed in a senior
positionintheAFM,oranotherrminthesamegroup,isunlikelytobe
considered independent under COLL 6.6.25R and we have amended our
guidance accordingly.
We have noted the comments on reducing the required period before
a director can be considered independent. However, to promote strong
independentgovernance,weconsideraminimumofveyearsis
necessary.
It is up to AFMs to decide if there has been a ‘material business interest’
for the purposes of the independence rules. For example, AFMs need
12 For these purposes any sort of remuneration is to be understood as any other remuneration apart from the fees they have received
for their services as independent directors.
20
PS18/8
Chapter 2
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
to decide when considering whether to appoint a former employee of
aconsultancyrm,wherethatemployeehadhelpedtheconsultancy
deliver work for the AFM in the relevant period.
Implementation period
Considering the weight of the feedback in the context of other
pressures on the sector in the short term, we have extended the
implementation period for this requirement from 12 to 18 months.
SM&CR Prescribed Responsibility and the appointment of an independent
chair
2.32 In CP17/18, we explained that we would consult on a new specific PR for AFMs, as
part of the extension of the SM&CR. This PR would make clear that a Senior Manager,
usually the chair of the board of an AFM, must take reasonable steps to ensure that the
firm complies with its obligation to carry out the assessment of value, the requirement
to recruit independent directors, and the requirement to act in the best interests of
fund investors. The FCA has to approve the appointment of Senior Managers. We
consulted on this PR in CP17/25.
2.33 In CP17/18, we noted the benefits of appointing either an executive or independent
member of the board to the position of chair and consulted on rules that would allow
an AFM board to make this decision itself. We asked:
Q10: Do you agree that it should be up to AFMs to decide whether
to appoint an independent director or an executive director
as chair?
Feedback received
Prescribed Responsibility
2.34 We received several responses to our proposal to introduce a new PR for AFMs under
the SM&CR. Most people agreed with our proposal, but a minority disagreed. Several
respondents stated that the exact requirements were uncertain, that the value for
money assessment was subjective, and that the person subject to the PR may be open
to retrospective criticism.
2.35 Individual respondents raised a variety of different questions or suggestions in
relation to the PR including that the PR should be split into two separate PRs, whether
the PR should refer to managing conflicts of interests specifically, where certain
responsibilities sat between the board and the chair, why this PR is the only sector
specific one and whether more guidance on the PR could be provided.
Chair of the board
2.36 We received several responses to our proposal to leave the decision on whether the
chair should be independent up to AFMs. These responses were mixed, with different
views on whether we should mandate an independent chair. Two respondents asked us
to do this, given the importance of the position. One respondent suggested that the
21
PS18/8
Chapter 2
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
perception of independence could be weakened if an independent director was not the
chair. Another expressed a strong preference for an executive chair, as independent
directors may not have sufficient knowledge of the business. Some respondents
requested that we clarify an apparent inconsistency between CP17/25 and CP17/18 on
the question of whether the PR would have to fall on an independent chair.
Our response
After considering the feedback, we have decided to implement the
Prescribed Responsibility for AFMs without further changes, as part of
theextensionoftheSM&CR.Weintendtopublishtherestofournal
rules for the extension of the SM&CR in summer 2018.
We have considered the arguments and concerns on independent chairs
and think that AFMs should decide this themselves because there may
be good reasons to choose either option.
13
However, we will monitor
the situation carefully and propose rule amendments if necessary. We
do not think that the substance of CP 17/25 (a SM&CR CP) contradicts
CP17/18, although we accept that the language used may have been
confusing.
We confirm that having an independent chair, or not, is the AFM’s
decision.
Impact on the competitiveness of the UK - both governance proposals
2.37 Several commentators and respondents argued that the changes we are introducing
on assessing the value delivered to investors and the appointment of independent
directors will damage the UK’s competitiveness, particularly after our exit from the
European Union.
2.38 Some respondents were concerned about the potential for regulatory arbitrage if
European Economic Area (EEA) non-UK AFMs use their passporting rights to manage
UK funds, or to market EEA non-UK funds in the UK.
Our response
We do not believe our proposals will damage the competitiveness
of UK firms. We recognise that the proposed package of remedies
will increase costs for some firms in the UK, but we expect that
the benefits will outweigh any costs. We think it is vital to the
competitiveness of the UK as a global centre for asset management
that clients are confident that the UK fund industry offers good value.
We also think our reforms will make the UK a more attractive place
for investors and will make the UK asset management industry more
competitive.
13 See paragraph 3.48 of CP17/18 for commentary on this.
22
PS18/8
Chapter 2
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Cost benet analysis - both governance proposals
2.39 A small number of respondents raised individual issues or questions regarding our
cost benefit analysis (CBA) including that we under-estimated how much it will cost
to implement the new rules, for example with regard to the role of other personnel
needed to assist the board to assess value. One respondent asked for clarification on
the payment of directors. They interpreted the CBA as making the assumption that
they would be ‘paid from scheme property’ and new payments out of scheme property
would require a unitholder vote.
Our response
Having considered the feedback, we believe that the conclusions of
the CBA still stand. In particular we consider that the estimate that
we set out in the CBA in CP17/18 for the cost of the time that support
personnel will expend in assisting directors with the assessment
of value remains valid. We would like to clarify what we believe is
a misunderstanding on the part of one of the respondents. We
assumed, for the purposes of the CBA, that the ongoing costs of
the independent directors will be passed through to fund investors
through higher charges. We did not, and do not, envisage that the
costs would be paid directly from the fund to the independent
directors. Rather, that the costs would flow through the AFM (i.e.
that the AFM would charge the fund an additional amount to cover
the payment by the AFM of the salaries and other costs associated
with the independent directors). Whether the additional costs of
independent directors should in fact be passed on to fund investors
by the AFM charging the fund a higher management fee is of course a
decision for AFMs.
23
PS18/8
Chapter 3
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
3 Moving fund investors to better value
share classes
3.1 In this chapter, we summarise the feedback received and provide our response on our
proposals to make it easier to move investors between share classes when this is in
their interests.
Our proposals
3.2 In CP17/18 we consulted on changes to our 2014 non-Handbook guidance (FG14/4)
to make it easier for fund investors to be moved to cheaper but otherwise identical
classes of the same fund. We call this type of movement a ‘conversion’. Our changes
to FG14/4 covered AFMs with a direct legal relationship with the fund investor.
14
The
key change was to remove the need for an AFM to get individual consent from each
investor before converting them. This had previously been a barrier to the conversion
of fund investors who did not respond to invitations from the AFM. We proposed
to keep within the guidance a recommendation that AFMs check that mandatory
conversions are in investors’ best interests.
3.3 In CP17/18 we asked:
Q11: Do you agree with the proposed modication of FG14/4?
If not, what alternative(s) would you propose?
Feedback received
3.4 All respondents supported our intent to make it easier to move investors to
cheaper but otherwise identical classes. There was significant support for our main
modification to FG14/4 - to remove the need for an AFM to get individual consent from
every investor before conversion. However, one respondent said that this proposal
interferes with a fund investor’s rights and that it is a new departure.
3.5 Several respondents agreed that the guidance should continue to recommend that
AFMs check that mandatory conversions are in investors’ best interests. However, one
respondent said that the need to record and demonstrate that a conversion was in the
best interests of the investors is a significant burden on AFMs.
3.6 A significant number of respondents argued that the open-ended notification
requirements we consulted on - for example for AFMs to make ‘best efforts’ and to
consider general communications such as press adverts - were still too onerous and/
or unclear and therefore likely to continue to prevent AFMs carrying out conversions.
14 i.e. that the relationship is not intermediated by a platform. FG14/4, includes a section of guidance on the situation in which a
platform is involved. We did not consult on changes to this section, and did not receive any feedback on this section.
24
PS18/8
Chapter 3
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
However, one respondent suggested that the FCA should require AFMs to use services
to track unresponsive investors.
3.7 Two respondents suggested that a mandatory conversion should be cleared with
the depositary in advance (instead of other actions such as informing the investors).
Several respondents said that they didn’t think the prospectus should have to allow
for mandatory conversions, before such conversions are permitted. One respondent
asked what AFMs should do when fund investors say that they do not want to
be converted to cheaper but otherwise identical share classes. One respondent
suggested AFMs simply reduce the management fees on the existing share classes.
Our response
Wehavepublishednal,recastnon-Handbookguidanceinwhichthe
need for the AFM to get individual consent from each investor before
converting them is removed. We are keeping the recommendation that
AFMs check mandatory conversions are consistent with investors’ best
interests beforehand. We think it is appropriate for AFMs to demonstrate
that they have done this.
After consideration of the feedback, we have decided to amend the
recast guidance so that it recommends AFMs make a simple
one-onoticationtoinvestors,whichdoesnotrequirearesponse,
a minimum of 60 days before a mandatory conversion. We think this
willaddressconcernsthatthenoticationrecommendationstoAFMs
that we consulted on remain too onerous and would in practice prevent
conversions.ThenalguidanceisinlinewithourrequirementsforAFMs
making other changes of similar importance to authorised funds.
15
We do not agree that AFMs should have to use tracing services as we
think that this would be disproportionate. Fund investors cannot be
madetorespondtoanoticationandwedon’tthinktheyshouldhave
to. We envisage this guidance being used primarily in situations where
AFMshavealreadyattemptedtocontactinvestors.Inthenalguidance
we state that an AFM should not make other changes to investors’ rights
as part of a mandatory conversion to a cheaper but otherwise identical
class.
We don’t agree that removing the need for individual consent for a
class conversion of the type we are considering here is a fundamental
interference with fund investors’ rights. Many other changes of similar or
higher impact on fund investors can be taken by AFMs under our existing
rulesafterasimplenoticationwithnoresponserequired,orafteravote
in a general meeting of fund investors (unitholders), in which only those
investors who participate have a voice.
After consideration, we have discounted the idea of having depositaries
check the merits of a proposed mandatory conversion. However, under
existing rules, among other duties, depositaries must make sure that a
proposed conversion meets the prospectus terms.
15 See COLL 4.3.
25
PS18/8
Chapter 3
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
We disagree with respondents who said that mandatory conversions
should be possible even if the prospectus does not allow them. We think
it is an important investor protection for the AFM to formally set out, in a
document that is widely available, the extent of its right to carry out such
transactions without the fund investors’ express consent.
As suggested by respondents, one option for an AFM to consider is
simply to reduce the charges on expensive classes from before the
retail distribution review (RDR) where trail commission is no longer paid.
However, we understand that it is not always commercially viable to run
a class for a small number of investors after the majority have converted
voluntarily. In these cases, merging classes to achieve economies of
scale is likely to be in the best interests of investors.
The recast version of FG14/4 will be effective from the date of this
publication, and is now known as FG18/3.
16
It is presented in Appendix
2 of this document.
Trail commission
3.8 CP17/18 asked questions for discussion about whether we should continue to allow
the payment of trail commission. We received a range of feedback on both sides of the
debate. We are grateful to respondents for sending us their views, which will inform our
wider consideration of trail commission. We are still considering the issue and have no
immediate plans to bring forward proposals for policy change at the moment.
16 www.fca.org.uk/publication/finalised-guidance/fg18-03.pdf
26
PS18/8
Chapter 4
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
4 Ensuring fairer treatment of dealing
profits
Our proposals
4.1 In chapter 5 of CP17/18 we set out proposals for fairer treatment of the dealing profits
that may arise when AFMs deal as principal in the units of their funds. We found
that the managers of some dual-priced authorised funds, by matching the units of
incoming and outgoing investors, were making a risk-free profit on the difference
between the dealing prices for those matched transactions. We proposed that the
profits should be repaid to the fund, for the benefit of investors.
4.2 In CP17/18 we asked:
Q15: Do you agree with our proposal to allow box prots to be
retained by the AFM when they have been earned through
an ‘at risk’ exposure, but not when they are achieved risk-
free?
Q16: Do you have any comments on whether risk-free prots
should be passed on to investors in the fund or given back to
subscribing / redeeming investors?
Feedback received
4.3 Over forty respondents to the paper commented on these proposals. Most agreed
with us that as a matter of principle, an AFM should not retain dealing profits where
there is no risk to its own capital. One respondent observed that the retention of
risk-free profits is an example of where the principle of treating customers fairly
has failed. However, a number of respondents, especially among those directly
involved in managing and administering authorised funds were concerned about the
practicalities of implementing our proposal as drafted and some possible unintended
consequences.
4.4 Some said the proposals were likely to be too complex in practice. They pointed out,
for example, the difficulty in analysing transactions where there are multiple classes
with different pricing bases and differing class conversion factors (for example
between income and accumulation units). A number of these respondents concluded
it would be simpler and more efficient to adopt single pricing or move to a non-profit-
making box model to address the concerns. This would also remove any opportunity to
manipulate the rule by treating risk-free profits as being held at risk.
4.5 Other respondents welcomed our statement that the use of a box can be compatible
with acting in the best interests of investors and elaborated on this theme. They noted
that the AFM, by dealing as principal, assumes the credit risk if an investor buying units
27
PS18/8
Chapter 4
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
defaults on the deal, so that the fund does not suffer as a result. While dual pricing
ensures transacting investors fully pay any resulting transaction costs, so there is
no dilution of the fund’s value, it also allows an AFM dealing as principal to set dealing
prices to reflect the trend of inflows and outflows. The AFM may choose not to reset
its pricing basis on a day when the net transactions are against the prevailing trend, so
incurring a loss on its own account to the benefit of some of the investors transacting
on that day.
4.6 A few respondents thought that we had not sufficiently recognised these relationships
between dual pricing, dealing as principal and box management, which explain how
dealing profits can arise. They saw this as implying that we do not see a future for dual
pricing and might want single pricing to replace it; one respondent suggested that any
changes to the treatment of box profits should form part of a wider review of dual and
single pricing.
4.7 Some respondents, while agreeing with our proposals for risk-free profits, suggested
that we had not correctly identified what is risk-free. They pointed out that any
reduction in the dealing spread requires the AFM to commit its own capital to hold
surplus units, and that in such cases the majority of the benefit from matching deals
goes to the transacting investors. They thought the proposed rule would force at-risk
profits to be paid to the fund and for payments to be made when there is actually a
box loss. They suggested that a rule stating that the manager cannot keep risk-free
box profits, without dictating which investors should benefit from such profits, would
achieve the policy objective while preserving flexibility.
4.8 Views on how to treat the risk-free amounts differed. The majority of respondents
who commented on this point thought it would be fairer and more practical to pay
the amounts into the fund as we had proposed, recognising the potential difficulty
of reallocating amounts to individuals. One said that passing the amounts to funds
holding illiquid assets such as property would help manage liquidity and avoid short-
termism. A few saw both approaches as acceptable, but some firmly favoured
returning the monies to transacting investors, arguing for example that the spread
in dual pricing is used to protect continuing investors, not reward them for the
transactions carried out by other investors when there is no underlying transaction in
the fund portfolio.
4.9 Some respondents suggested alternative ways in which the aim of the proposal could
be achieved without preventing AFMs from profiting from at-risk unit holdings. One
proposed that AFMs could analyse cash flows to assess box activity profits each
quarter and pay an appropriate amount to the fund, after deducting the return on the
units held over the quarter. Several others also commented on the practical difficulties
of having to pay small amounts into the fund on what would typically be a daily basis.
4.10 Some people were concerned about how payments into scheme property would
affect the fund. Respondents asked how the amounts should be treated for tax and
accounting purposes and what should be done with the income element of the unit
price. Some thought that these amounts might distort investment performance,
making some dual-priced funds look relatively more attractive than their single-priced
counterparts, and asked how the adjustments should be treated when calculating a
performance fee.
4.11 There weren’t many comments on our proposals to enhance disclosures in the
prospectus about the AFM’s approach to box management and retention of dealing
28
PS18/8
Chapter 4
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
profits. One respondent asked whether other documents, like the key investor
information document, should include a statement on this, and how payments should
be detailed in the periodic reports and accounts. A trade association respondent
said that full transparency on box profits would be important, with disclosure of the
amounts paid to the fund and their impact on performance.
4.12 Finally, a number of respondents suggested that the six-month transitional period we
proposed under-estimates the complexity of the systems and procedural changes
needed and asked for more time. These changes will significantly affect the fund
administration and accounting functions, which are often outsourced to specialist
providers acting for multiple AFMs. One respondent noted that assurances about the
longer-term future of dual pricing would be welcome, to give firms confidence to invest
in upgrading their systems.
Our response
We welcome the broad support for our proposal and intend to proceed
with it. We are grateful for the detailed technical feedback received and
haveusedthistomakesomeadjustmentstoimprovethenalrulesand
guidance.
We said in the CP that the use of a manager’s box can be compatible with
acting in the best interests of investors, and that AFMs are entitled to
commit their own capital to a fund and participate in its risks and returns.
This is still our view.
We have no plans to review the fund pricing regime and we stand by
the position we (as the Financial Services Authority (FSA)) set out in
PS06/9.
17
Both single pricing and dual pricing have their advantages
and drawbacks for fund investors, so we think it is fair to allow the
methodologies to co-exist as long as they both continue to provide
adequate investor protection and the market determines there is a
place for them. We acknowledge the arguments that dual pricing may be
especially suitable for some asset classes such as land and property.
Thekeyadjustmentswehavemadeinthenalrulesare:
• torequiretheAFMnottoretainrisk-freeboxprotsandtoallocate
them in a way that is fair to unitholders, while removing the obligation
topaythemtothefund;guidanceindicatesthatprotscouldbe
allocated fairly by paying them to the fund or to individual investors
who have bought and sold units
• torecognisesituationswhererisk-freeprotsareosetbylosses
on some transactions, when the dealing spread is narrower than the
maximum permitted spread, and
• to change the frequency for making payments to the fund.
17 PS06/9 Single and dual pricing for authorised collective investment schemes – feedback on CP06/7, October 2006.
29
PS18/8
Chapter 4
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Wehaveprovidedamoredetailedtechnicalcommentaryonthenal
rulesinAnnex2tohelpthermsthatwillneedtoimplementsystems
and procedural changes.
We recognise that modifying the rule in these ways does not remove
all the operational complexities that respondents to the CP noted, and
may add to them. We have sought to strike a balance between good
outcomes for investors and the operational demands the changes place
onrms.
We accept that AFMs and their service providers should be given
enough time to prepare for these rule changes, especially as the
calculation of the new payments will depend on IT solutions. We
do not want to leave AFMs with no option but to discontinue box
management, simply because they do not have enough time to
design, test and implement new processes. For this reason, we are
deferring the commencement date to allow firms 12 months to make
the changes.
Role of the depositary
4.13 We also explained in the paper that our rule on the duties of depositaries will require
them to oversee compliance with the proposed rule changes. In CP17/18 we asked:
Q17: Do you have any comments on our proposed approach
to include the proposed changes on risk-free box prots
as part of the existing monitoring requirements on
depositaries?
4.14 Seventeen respondents commented on this question. They broadly agreed that
the proposed changes were compatible with the depositary’s current duties, and
some thought that there should not be any significant additional burden. However,
depositaries commented that it was not clear what level of oversight would be required
and outlined some of the possible impacts. They asked whether the FCA envisaged
a depositary’s duties as covering a daily review or re-performance of the AFM’s
calculation on its risk-free box profits figures, in which case the impact would be far
greater than checks which rely on the AFM’s calculation.
4.15 Depositaries also noted the potential need to recruit and train additional staff to
perform the new tasks, as well as the additional work needed to oversee the unit
creation and cancellation process if daily payments are made to the fund. Some other
respondents, including some fund managers, shared these concerns and wondered
whether an increase in their duties would lead to an increase in fees to cover their
additional costs.
4.16 Depositaries disagreed with the assertion in our CBA that their additional costs would
be minimal. In their view, this is a new requirement rather than an additional element in
their existing duty of oversight, which will result in additional costs. The scale of those
costs will depend on how much oversight we expect them to undertake.
30
PS18/8
Chapter 4
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
4.17 Some respondents, including consumer representatives, said that in addition to the
oversight provided by depositaries, the level of box profits should be considered by the
board as part of the value assessment involving the proposed independent directors.
Our response
Itwasnotourintentiontoexpandsignicantlythescopeofdepositaries’
oversight or to make the performance of their current duties more
onerous. We believe that the changes we have made to the rule will go
some way to reassure depositaries on this point, but for the avoidance of
doubtweconrmthatwedonotexpectthemtocarryoutdailychecks
onwhethertheAFMhascorrectlycalculateditsdealingprots.
Itshouldbesucienttoensurethattheamountdeterminedby
theAFMisreectedinthepricecalculationwhereitismaterial,that
payments accrued for in the fund valuation are regularly received into
the fund’s account, and that any rule breaches are recorded in the usual
way. We would also expect the depositary to review periodically the
AFM’s processes relating to this rule, as part of its wider testing of the
eectivenessoftheAFM’scontrolsovervaluationandpricing.Such
checks might include sample testing of the calculations performed by
the AFM to ensure they are complete and accurate.
AFMs’ scrutiny of any dealing profits they make should form part of
their wider assessment of how they deliver value to investors, so it
would be appropriate for the AFM board to consider the matter.
31
PS18/8
Chapter 5
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
5 Discussion feedback: extending the
scope of our governance proposals to
other investment products
5.1 This chapter sets out the feedback on the discussion questions in chapter 6 of
CP17/18 and gives our response.
Discussion topics
5.2 In CP17/18 we asked for views on whether we should extend any aspects of our
governance proposals for the authorised funds market to other investment products,
specifically to unit-linked and with-profits insurance products and investment trusts
(also referred to as investment companies
18
).
5.3 We said that we did not propose to extend the proposals to pensions, as we would
instead consider this as part of our work on non-workplace pensions.
5.4 In CP17/18 we asked:
Q18: Are current arrangements, particularly for with-prots
business, t for purpose and can they achieve the same
outcomes? If so, please elaborate on how they achieve
those outcomes.
Q19: Would additional or alternative approaches be more
appropriate or cost-eective for tackling the same
issues? For example, would the independent governance
committees set up by life insurers and used for workplace
pensions be appropriate for other products as well?
Q20: What would the costs, challenges and resource implications
be for rms if we applied the proposals in Chapter 3 to life
insurers?
Q21: What would the potential benets be for consumers
and rms of introducing any additional governance
requirements for unit-linked funds and with-prots
business?
Q22: Would there be a risk of investor harm or disruption to the
market if we did not extend our proposals for authorised
funds to unit-linked or with-prots business?
Q23: Do you agree with our proposed approach to pension
products?
18 Investment trust/companies are corporations listed under Chapter 15 of the Listing Rules whose main business is to act as closed-
ended pooled investment vehicles.
32
PS18/8
Chapter 5
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Q24: What are your views on whether it would be appropriate and
proportionate for the FCA to consider introducing similar
rules to those proposed for authorised funds for investment
companies?
Q25: Is there a risk of investor harm or disruption to the market
if we do not extend our proposals for authorised funds to
investment companies? If so, how would this risk aect
investors?
Feedback received
General
5.5 We received over 40 responses to our questions in CP17/18 and held discussions with
a range of industry participants. Responses supported consistency of governance
and oversight across the retail investment market, but noted that this would not
necessarily need the same governance structures. Some respondents noted
that potential benefits from an extension would include greater transparency and
consumer confidence, and lower charges. Other respondents considered that investor
harm had not been established to justify an extension and that this could result in
duplicating current governance arrangements and increasing costs for firms, and so
ultimately consumers.
Detail
5.6 For with-profits business, a number of respondents expressed the view that the
current arrangements work well, and that our COBS rules replicated the outcomes
sought by our governance proposal for authorised funds. However, some disagreed,
stating that the opaque nature of with-profits products can lead to hidden charges and
poor consumer outcomes.
5.7 For unit-linked business, some respondents believed that current arrangements
were adequate and pointed to a range of factors such as firm governance structures,
and the value provided to consumers by insurers as institutional buyers. These
respondents also highlighted regulatory requirements such as the role of IGCs over
those unit-linked funds in workplace pensions, forthcoming product governance
requirements in the Insurance Distribution Directive,
19
and our guidance on the fair
treatment of long-standing customers.
20
Other respondents argued that extending
the governance proposals to unit-linked funds would be beneficial.
5.8 Most respondents disagreed with extending the role of IGCs. Some respondents
considered that they were a relatively new and untested feature, while others
considered that IGCs were put in place for a specific purpose and product set
(workplace pensions) and that this had not been justified for unit-linked and with-
profits business.
5.9 For investment trusts, a respondent said that the governance arrangements already
delivered what we were aiming for with authorised funds. This respondent noted
that investment trust governing bodies are required under FCA listing rules to have
19 https://www.fca.org.uk/publications/policy-statements/ps18-1-insurance-distribution-directive-implementation-feedback-and-
near-final-rules
20 https://www.fca.org.uk/publications/finalised-guidance/fair-treatment-long-standing-customers-life-insurance-sector
33
PS18/8
Chapter 5
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
a majority of independent directors. The respondent said that an investment trust
governing body cannot be outranked or controlled by the external asset manager
entity they have appointed, and can choose to appoint another manager if necessary.
The respondent also noted that the investors in the ‘funds’ (the trusts) are the trusts’
shareholders and that as such investment trust governing bodies are not conflicted.
The respondent was not supportive of extending the governance proposals in CP17/18
Chapter 3 to investment trusts.
5.10 Most respondents agreed with our proposal to look at whether we should be doing
more to consider governance as part of the work we have committed to on non-
workplace pensions. A few respondents felt that it would be better to consider all of
these products together and have a common view and common requirements.
5.11 Other options suggested by respondents were:
• updating the Association of British Insurers (ABI) guide to good practice for unit-
linked funds
21
and for the FCA to join the ABI’s unit-linked working group
• the FCA developing further guidance on value for money
• the FCA to undertake further work on unit-linked products to demonstrate adverse
outcomes exist
• anextensionoftheconceptofthewith-protscommitteetoothertypesof
products
Our response
As we stated in CP17/18, while the AMMS did not focus on unit-linked
orwith-protsbusiness,concernshighlightedbythatworkaroundvalue
for money and governance in authorised funds may also exist for these
types of retail investment products and similar theories of harm may be
relevant.
Wehaveongoingdiagnosticworkintowith-protsandunit-linked
products that will improve our view of any harm that exists in these
markets. Once this work has concluded later this year, we will decide
whetherfurtherinterventioninrelationtounit-linkedandwith-prots
products is required, and the most appropriate way for us to do this. We
expecttocommunicateaviewonthisinthersthalfof2019.
As our diagnostic work will give us a clearer view on whether harm exists
in these markets, we do not consider it is appropriate to provide further
guidance on value for money or to consider the wider application of with-
protscommitteesatthistime.Wewillcontinuetoengagewithindustry
stakeholders on these issues as our work progresses during the course
of this year.
21 https://www.abi.org.uk/globalassets/sitecore/files/documents/publications/public/2014/conduct/abi-guide-to-good-practice-for-
unit-linked-funds.pdf
34
PS18/8
Chapter 5
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
We are keeping the possibility of further changes to investment trust
governance arrangements under review, but we do not plan any
immediate action on this.
Given the feedback received, we are not bringing forward proposals
on extending the governance proposals to pensions at this time, but
we will continue to consider these issues as part of our work on non-
workplace pensions.
35
PS18/8
Annex 1
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Annex 1
List of non-confidential respondents
Allianz Global Investors
Artemis
Arthur J Gallagher
Association of British Insurers
Association of Financial Mutuals
B&CE
Baillie Gifford
BankofNewYorkMellon
Barnett Waddingham
BlackRock
BPH Wealth Management
Brian Shearing & Partners
Castle Investments
CFA Society UK
Chapters Financial
DMS Governance
DPI Financial Services
DST Systems
Equitile Investments
Eversheds Sutherland
Excalibur
Family Finance Centre Group
FCA Practitioner Panel
36
PS18/8
Annex 1
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Financial Inclusion Centre
Financial Services Consumer Panel
FK Financial
Hermes Investment Management
Institute & Faculty of Actuaries
Investment & Life Assurance Group
Jackson Hodge Wealth Management Services
JLT Employee Benefits
JP Morgan Asset Management
Jupiter Asset Management
Liontrust Asset Management
M&G Investment Management
Majedie Asset Management
Mr Martin Pagett
New City Initiative
Old Mutual
Orbis
Pensions & Lifetime Savings Association
Personal Investment Management & Financial Advice Association (PIMFA)
Philip J Milton & Company
Positive Wealth Creation
Principles for Responsible Investment
RGA IFA
Mr Roger Morton
Royal London Asset Management
Sarasin Investment Funds
SCM Direct
37
PS18/8
Annex 1
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Scottish Widows
Securities Industry & Financial Markets Association
ShareAction
St James’s Place
State Street Global Advisors
Mr Stewart Cazier
Strathayr Financial Services
The 100 Group Pensions Committee
The Association of Investment Companies
The Depositary and Trustee Association
The Investment Association
The Online Partnership
The Society of Pension Professionals
UK Sustainable Investment and Finance Association
Wesleyan
Willis Owen
38
PS18/8
Annex 2
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Annex 2
Commentary on risk-free box profits rules
and guidance
1. As noted in Chapter 4, the following commentary explains in more detail the rationale
for the final rules on risk-free box profits and the effect we expect them to have on
firms’ unit dealing processes.
2. We have taken account of comments about some of the likely consequences of the
proposal to identify risk-free profits and pay them into scheme property. We have
redrafted COLL 6.3.5DR so it requires the AFM (and its associates) to make sure
they do not profit from risk-free matching of unit sales and redemptions. The revised
drafting acknowledges that any preliminary charge or redemption charge due to the
AFM is not affected by this rule.
3. Although the draft rule would have achieved its purpose where the AFM charges the
maximum permitted dealing spread between the sale and redemption prices, it might
have had unintended consequences where the AFM sets a narrower dealing spread
than the maximum amount permitted. When this happens, the AFM is returning an
element of the spread to the transacting investors, instead of taking it as profit. Just
as the AFM can make a same-day profit free of market risk by matching deals, it can
make a same-day loss on unmatched deals either by selling units below issue price
which it then has to create to satisfy demand, or by redeeming units at a price above
cancellation price and then immediately cancelling the surplus.
4. The draft rule considered only the difference between the sale and redemption prices
of units in matched deals, and not whether those prices differ from the maximum
permitted prices or whether the AFM is incurring losses through the narrower spread.
The draft rule would cause the AFM to make payments to the fund where it has already
given up profits or even made an overall loss on box transactions at that valuation
point.
5. We accept that it would be unsatisfactory if our rules disincentivised AFMs from
offering investors narrower dealing spreads. An AFM that sets dealing spreads to the
advantage of transacting investors should not be penalised for doing so, compared to
one that charges the maximum possible spread between sales and redemptions.
6. To address this point, we have expanded COLL 6.3.5DR to recognise situations where
the AFM’s risk-free profit made on matched sales and redemptions is offset by a loss
on certain sales and redemptions. Specifically, the rule amendment should allow a loss
to be recognised where:
• unmatched units from sales must be met by creation of new units, when the
creation(issue)priceisaboveoer(sale)price
• unmatched units from repurchases are cancelled immediately and not held on the
box, when bid (redemption) price is above cancellation price
39
PS18/8
Annex 2
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
7. The effects of the rule are that:
a. lossesonsalescannotbeosetifitwouldhavebeenpossibletocoverthesalefrom
units held on the box or redeemed at the same valuation point (this is purely for
the purpose of calculating the amount due to the fund under this rule; it does not
prescribe how the AFM actually chooses to allocate old and new units from the box)
b. theamountofprottheAFMmustgiveupisnotreducedtotakeaccountofany
adjustments made to correct dealing errors relating to previous valuation points
c. wheretheosettingoflossesagainstrisk-freeprotresultsinanoverallboxloss,
thislosscannotbecarriedforwardtoosetanetrisk-freeprotondaytwoand
reduce the amount the AFM must give up – it must be reset to zero after each
valuation point
8. The amended rule is not intended either to force the AFM to set a narrower dealing
spread, or on the other hand to protect it from ever suffering a loss. However, it should
treat AFMs more equitably when they commit their own capital to the box by assuming
at-risk positions and setting dealing spreads to benefit the investor over the AFM itself.
9. Although the final rules do not require payment of a sum into the fund to represent the
risk-free profit, we still think this is one way of fairly allocating any amount not returned
to investors through a narrower dealing spread. We have added guidance in COLL
6.3.5EG (2) to cover this point while indicating that alternatives are possible.
10. We have reconsidered the proposed requirement for risk-free profits to be paid into
scheme property at the same frequency as the fund is dealt. We have added guidance
that these payments could be aligned with payments out of scheme property for fees
and expenses due to the AFM and other parties. Thus, the relevant amount should
in principle be accrued in each price calculation, but for administrative purposes the
actual transfer of cash might take place on a periodic basis, typically monthly.
11. We recognise that calculating and accruing for the exact amount of risk-free profit may
be complex and the additional process should not delay the AFM from calculating and
publishing unit prices, especially when the fund offers daily dealing. So, we have added
guidance at COLL 6.3.5EG (4) that the unit price calculation should include an accrual
for the AFM’s reasonable estimate of the total payment due to the fund at that point,
where it is sufficiently material to affect the unit price to the fourth significant figure.
This estimate should be regularly adjusted once the final calculation for preceding
valuation points has been made.
12. We have not identified any issues affecting the treatment of these payments for tax or
accounting purposes that should be addressed through Handbook rules or guidance.
The monies represent an element of the capital subscribed by investors, which has
passed through the AFM as principal instead of being paid directly to the fund. The
treatment of these monies within the portfolio should follow accordingly. As the
difference between a bid price and an offer price is a capital difference, we do not think
the treatment of any income accrued in the unit price will be adversely affected by the
rule change.
13. For similar reasons, we have not added further rules or guidance on investment
performance records or performance fees. The new rule’s effect is to move the
fund closer to the position it would be in if the AFM chose to deal as agent for the
40
PS18/8
Annex 2
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
fund, rather than as principal. In that case, any difference in the dealing spread
would automatically pass to the fund, which would not be seen as a distortion of its
performance. As for performance fees, it is for the AFM to work out how to calculate
them fairly for investors, and we will consider this when reviewing the effect of our rule
changes.
14. We are proceeding with the rules on disclosure, subject to some minor drafting
changes. Regarding the information to be provided in periodic manager’s reports and
accounts, the Statement of Recommended Practice (SORP) for authorised funds
might need to be amended to take account of payments of risk-free box profits into
scheme property.
41
PS18/8
Annex 3
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Annex 3
Abbreviations used in this paper
used in this paper
ABI Association of British Insurers
AFM authorised fund manager
AIFM Alternative Investment Fund Managers (Directive 2011/61/EU)
AMMS asset management market study
AUM assets under management
CBA cost benefit analysis
COBS Conduct of Business sourcebook
COCON Code of Conduct sourcebook
COLL Collective Investment Schemes sourcebook
CP consultation paper
EEA European Economic Area
FCA Financial Conduct Authority
FG final guidance
FSA Financial Services Authority
IDWG institutional disclosure working group
IGC independent governance committee
MiFID II the recast Markets in Financial Instruments Directive (2014/65/EU)
NED non-executive director
PR prescribed responsibility
PRIIPs
Packaged Retail and Insurance-based Investment Products (Regulation
EU 1286/2014)
PS policy statement
42
PS18/8
Annex 3
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
RDR retail distribution review
SM&CR senior managers and certification regime
SORP statement of recommended practice
SYSC Senior Management Arrangements, Systems and Controls sourcebook
UCITS
Undertakings for Collective Investment in Transferable Securities
(Directive 2009/65/EC)
VfM value for money
We have developed the policy in this Policy Statement in the context of the existing UK and EU
regulatory framework. The Government has made clear that it will continue to implement and apply
EU law until the UK has left the EU. We will keep the proposals under review to assess whether any
amendments may be required in the event of changes in the UK regulatory framework in the future.
All our publications are available to download from www.fca.org.uk. If you would like to receive this
paper in an alternative format, please call 020 7066 9644 or email: publications_graphics@fca.org.uk
or write to: Editorial and Digital team, Financial Conduct Authority, 25 The North Colonnade, Canary
Wharf, London E14 5HS
43
PS18/8
Appendix 1
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Appendix 1
Made rules (legal instrument)
FCA 2018/17
COLLECTIVE INVESTMENT SCHEMES SOURCEBOOK (MISCELLANEOUS
AMENDMENTS) INSTRUMENT 2018
Powers exercised
A. The Financial Conduct Authority makes this instrument in the exercise of the
following powers and related provisions in or under:
(1) the following sections of the Financial Services and Markets Act 2000 (“the
Act”):
(a) section 137A (The FCA’s general rules);
(b) section 137T (General supplementary powers);
(c) section 139A (Power of the FCA to give guidance);
(d) section 247 (Trust scheme rules);
(e) section 248 (Scheme particulars rules);
(f) section 261I (Contractual scheme rules);
(g) section 261J (Contractual scheme particulars rules); and
(2) regulation 6(1) of the Open-Ended Investment Companies Regulations 2001
(SI 2001/1228).
B. The rule-making provisions listed above are specified for the purposes of section
138G(2) (Rule-making instruments) of the Act.
Commencement
C. Part 1 of the Annex to this instrument comes into force on 1 April 2019 and Part 2 of
the Annex to this instrument comes into force on 30 September 2019.
Amendments to the Handbook
E. The Collective Investment Schemes sourcebook (COLL) is amended in accordance
with the Annex to this instrument.
Citation
F. This instrument may be cited as the Collective Investment Schemes Sourcebook
(Miscellaneous Amendments) Instrument 2018.
By order of the Board
22 March 2018
FCA 2018/17
Page 2 of 18
Annex
Amendments to the Collective Investment Schemes sourcebook (COLL)
In this Annex, underlining indicates new text and striking through indicates deleted text.
Part 1: Comes into force 1 April 2019
4 Investor Relations
…
4.2 Pre-sale notifications
…
Table: contents of the prospectus
4.2.5 R This table belongs to COLL 4.2.2R (Publishing the prospectus).
…
Dealing
17 The following particulars
…
(h) in a prospectus available during the period of any initial
offer:
…
(vi) any other relevant details of the initial offer; and
(i) whether a unitholder may effect transfer of title to units on
the authority of an electronic communication and if so the
conditions that must be satisfied in order to effect a transfer;
and
(j) if the authorised fund manager deals as principal in units of
the scheme and holds them for that purpose, a statement of its
policy for doing so and, where applicable:
(i) a description of when the authorised fund manager
may retain any profits it earns and absorb any losses it
incurs for these activities; and
(ii) a statement of non-accountability as referred to in
COLL 6.7.16G.
FCA 2018/17
Page 3 of 18
…
…
Guidance on contents of the prospectus
4.2.6 G …
(3) In relation to COLL 4.2.5R(27), the prospectus might include a
statement of the authorised fund manager’s policy in relation to
holding units in the scheme as principal, and in particular whether it
seeks to make a profit from doing so. It might also include a
prominent statement of non-accountability referred to in COLL
6.7.16G (Exemptions from liability to account for profits). [deleted]
…
…
6 Operating duties and responsibilities
…
6.3 Valuation and pricing
…
Profits from dealing as principal
6.3.5D R (1) Where an authorised fund manager (AFM):
(a) accepts instructions to sell and redeem units as principal; and
(b) is able to execute a sale instruction by selling units it has
redeemed at the same valuation point, without placing its
own capital at risk,
subject to (2), the AFM must not retain for its own account, or the
account of any of its associates, the difference between the price at
which a unit was redeemed (before deduction of any redemption
charge) and the price at which the same unit was sold (after
deduction of any preliminary charge). Any such difference must be
allocated in a way that is fair to unitholders.
(2) In calculating the profit arising under (1), the AFM may offset any
loss it incurs at the same valuation point, calculated in accordance
with (3) below, when dealing as principal in relation to:
(a) a unit issued at that valuation point to fulfil a sale instruction
that cannot be matched against any redeemed unit or any
other unit of that class held by the manager as principal; and
FCA 2018/17
Page 4 of 18
(b) a unit redeemed and cancelled at that valuation point.
(3) The amount of the loss referred to in (2) is:
(a) for units issued in accordance with (2)(a), the difference
between the issue price of a unit and the sale price of that
unit, less any preliminary charge;
(b) for units cancelled in accordance with (2)(b), the difference
between the cancellation price of a unit and the redemption
price of that unit, before any redemption charge is applied.
(4) Where any loss arising under (2) is greater than any profit arising
under (1), that loss cannot be offset against any profit arising at a
subsequent valuation point.
(5) This rule applies to the redemption and sale of units of different
classes at the same valuation point, if those classes are treated as one
for the purpose of COLL 6.2.6AR.
6.3.5E G (1) The authorised fund manager may commit its own capital to hold
units for the purpose of dealing as principal and may seek to profit
from gains in the value of the units it holds, when it issues or
redeems units at one valuation point then sells or cancels them at a
later valuation point. However, it should not profit from situations
in which it is not exposed to an equal risk of loss if the units fall in
value, or from the ability to match simultaneous sales and
redemptions at different prices at no risk to its own capital.
(2) The AFM may allocate any amount arising under COLL 6.3.5DR(1)
in the interests of investors by paying it into scheme property for the
benefit of all unitholders. Alternatively, the AFM may redistribute it
individually among the transacting investors.
(3) Where the AFM intends to allocate a payment to scheme property, it
should determine if the amount (when added to any other amounts of
the same kind relating to that class of units) would, if taken into
account in the scheme’s valuation, affect the accuracy of the unit
prices to four significant figures. If so, and subject to (4) below, the
amount should be accrued in each subsequent valuation of the
scheme until the payment is transferred. Such payments into scheme
property should be made regularly and no less frequently than
payments for the AFM’s management charge are transferred out of
scheme property.
(4) The calculation to be performed under COLL 6.3.5DR should be
carried out in relation to each valuation point of the scheme on a
timely basis. Where it is not practical to do this before unit prices
are calculated and published, the AFM should ensure that the accrual
represents a reasonable estimate of the total payment it intends to
FCA 2018/17
Page 5 of 18
make to scheme property.
…
6.7 Payments
…
Exemptions from liability to account for profits
6.7.16 G An Except as provided in COLL 6.3.5DR, an affected person is not liable to
account to another affected person or to the unitholders of any scheme for
any profits or benefits it makes or receives that are made or derived from or
in connection with:
…
…
8 Qualified investor schemes
…
8.3 Investor relations
…
Table: contents of qualified investor scheme prospectus
8.3.4 R This table belongs to COLL 8.3.2R.
…
13 Dealing
Details of:
…
(9) the circumstances in which direct issue or cancellation of
units by the ICVC or the depositary of an AUT or ACS (as
appropriate) may occur and the relevant procedures for such
issues and cancellations; and
(10) whether a unitholder may effect transfer of title to units on
the authority of an electronic communication and if so the
conditions that must be satisfied in order to effect a transfer;
and
(11) if the authorised fund manager deals as principal in units of
the scheme and holds them for that purpose, a statement of its
policy for doing so and, where applicable:
FCA 2018/17
Page 6 of 18
(a) a description of when the authorised fund manager
may retain any profits it earns and absorb any losses it
incurs for these activities; and
(b) a statement of non-accountability as referred to in
COLL 8.5.14G.
…
…
8.5 Powers and responsibilities
…
8.5.9 …
Profits from dealing as principal
8.5.9-B R (1) Where an authorised fund manager:
(a) accepts instructions to sell and redeem units as principal; and
(b) is able to execute a sale instruction by selling units it has
redeemed at the same valuation point, without placing its
own capital at risk,
subject to (2), the AFM must not retain for its own account, or the
account of any of its associates, the difference between the price at
which a unit was redeemed (before deduction of any redemption
charge) and the price at which the same unit was sold (after
deduction of any preliminary charge). Any such difference must be
allocated in a way that is fair to unitholders.
(2) In calculating the profit arising under (1), the AFM may offset any
loss it incurs at the same valuation point, calculated in accordance
with (3), when dealing as principal in relation to:
(a) a unit issued at that valuation point to fulfil a sale instruction
that cannot be matched against any redeemed unit or any
other unit of that class held by the manager as principal; and
(b) a unit redeemed and cancelled at that valuation point.
(3) The amount of the loss referred to in (2) is:
(a) for units issued in accordance with (2)(a), the difference
between the issue price of a unit and the sale price of that
unit, less any preliminary charge;
(b) for units cancelled in accordance with (2)(b), the difference
between the cancellation price of a unit and the redemption
FCA 2018/17
Page 7 of 18
price of that unit, before any redemption charge is applied.
(4) Where any loss arising under (2) is greater than any profit arising
under (1), that loss cannot be offset against any profit arising at a
subsequent valuation point.
(5) This rule applies to the redemption and sale of units of different
classes at the same valuation point, if those classes are treated as one
for the purpose of COLL 8.5.10AR.
8.5.9-A G (1) The authorised fund manager may commit its own capital to hold
units for dealing as principal and may seek to profit from gains in
the value of the units it holds, when it issues or redeems units at one
valuation point then sells or cancels them at a later valuation point.
However, it should not profit from situations in which it is not
exposed to an equal risk of loss if the units fall in value, or from the
ability to match simultaneous sales and redemptions at different
prices at no risk to its own capital.
(2) The AFM may allocate any amount arising under COLL 8.5.9-BR(1)
in the interests of investors by paying it into scheme property for the
benefit of all unitholders. Alternatively, the AFM may redistribute it
individually among the transacting investors.
(3) Where the AFM intends to allocate a payment to scheme property, it
should determine if the amount (when added to any other amounts of
the same kind relating to that class of units) would, if taken into
account in the scheme’s valuation, affect the accuracy of the unit
prices to four significant figures. If so, and subject to (4) below, the
amount should be accrued in each subsequent valuation of the
scheme until the payment is transferred. Such payments into scheme
property should be made regularly and no less frequently than
payments for the AFM’s management charge are transferred out of
scheme property.
(4) The calculation to be performed under COLL 8.5.9-BR should be
carried out in relation to each valuation point of the scheme on a
timely basis. Where it is not practical to do this before unit prices are
calculated and published, the AFM should ensure that the accrual
represents a reasonable estimate of the total payment it intends to
make to scheme property.
Maintaining the value of a short-term money market fund
8.5.9A R …
…
Exemptions from liability to account for profits
8.5.14 G An Except as provided in COLL 8.5.9-BR, an affected person is not liable to
account to another affected person or to the unitholders of any scheme for
FCA 2018/17
Page 8 of 18
any profits or benefits it makes or receives that are made or derived from or
in connection with:
…
…
Part 2: Comes into force 30 September 2019
4 Investor Relations
…
4.5 Reports and accounts
…
Contents of the annual long report
4.5.7 R …
(5) An annual long report of a UCITS scheme which is a feeder UCITS
must also include:
(a) a statement on the aggregate charges of the payments out of
scheme property as set out in the prospectus (in this rule
“charges”) of the feeder UCITS and the master UCITS; and
…
…
(8)
An annual long report of an authorised fund must also contain a
statement setting out a description of the assessment of value
required by COLL 6.6.20R including:
(a) a separate discussion and conclusion for the matters covered
in each paragraph of COLL 6.6.21R, and for each other
matter that formed part of the assessment, covering the
considerations taken into account in the assessment, a
summary of its findings and the steps undertaken as part of or
as a consequence of the assessment;
(b) an explanation for any case in which benefits from
economies of scale that were identified in the assessment
have not been passed on to unitholders;
(c) an explanation for any case in which unitholders hold units in
a class that is subject to higher charges than those applying to
FCA 2018/17
Page 9 of 18
other classes of the same scheme with substantially similar
rights;
(d) the conclusion of the authorised fund manager’s assessment
of whether the charges are justified in the context of the
overall value delivered to the unitholders in the scheme; and
(e) if the assessment has identified that the charges are not
justified in the context of the overall value delivered to the
unitholders, a clear explanation of what action has been or
will be taken to address the situation.
(9) An AFM need not include the statement required by (8) in its annual
long report if it makes the statement available to unitholders
annually in a composite report covering two or more of the
authorised funds it manages, published in the same manner as the
annual long report.
4.5.7A G …
(5) An AFM which is not subject to COLL 6.6.20R as a result of COLL
6.6.19R is not required to comply with COLL 4.5.7R(8) or (9).
…
6 Operating duties and responsibilities
…
6.6 Powers and duties of the scheme, the authorised fund manager, and the
depositary
…
Table of application
6.6.2 R This table belongs to COLL 6.6.1R.
Rule ICVC ACD
Any
other
directors
of an
ICVC
Depositary
of an ICVC
Authorise
d fund
manager
of an AUT
or ACS
Depositary
of an AUT
or ACS
6.6.18G …
6.6.19R x x
x
6.6.20R x x
x
6.6.21R x x
x
FCA 2018/17
Page 10 of 18
6.6.22G x x
x
6.6.23E x x
x
6.6.24G x x
x
6.6.25R x x
x
6.6.26G x x
x
Notes: …
(5) COLL 6.6.20R to COLL 6.6.26G have a special
application as set out in COLL 6.6.19R.
…
Application of assessment of value and independent director rules
6.6.19 R COLL 6.6.20R to COLL 6.6.26G apply to:
(1) an authorised fund manager (other than an EEA UCITS management
company or an EEA AIFM) of an AUT, ACS or ICVC; and
(2) a UK UCITS management company providing collective portfolio
management services for an EEA UCITS scheme from a branch in
another EEA State or under the freedom to provide cross border
services.
Assessment of value
6.6.20 R (1) An authorised fund manager must conduct an assessment at least
annually for each scheme it manages of whether the payments out of
scheme property set out in the prospectus are justified in the context
of the overall value delivered to unitholders.
(2) In carrying out the assessment required by (1), the AFM must,
separately for each class of units in a scheme, consider at least the
matters set out in COLL 6.6.21R (Table: minimum considerations –
assessment of value).
Table: minimum considerations – assessment of value
6.6.21 R This table belongs to COLL 6.6.20R (Assessment of value).
Quality of service
(1) The range and quality of services provided to unitholders.
Performance
FCA 2018/17
Page 11 of 18
(2) The performance of the scheme, after deduction of all payments out
of scheme property as set out in the prospectus (in this rule, COLL
6.6.23E and COLL 8.5.19E, “charges”). Performance should be
considered over an appropriate timescale having regard to the
scheme’s investment objectives, policy and strategy.
AFM costs - general
(3) In relation to each charge, the cost of providing the service to which
the charge relates, and when money is paid directly to associates or
external parties, the cost is the amount paid to that person.
Economies of scale
(4) Whether the AFM is able to achieve savings and benefits from
economies of scale, relating to the direct and indirect costs of
managing the scheme property and taking into account the value of
the scheme property and whether it has grown or contracted in size
as a result of the sale and redemption of units.
Comparable market rates
(5) In relation to each service, the market rate for any comparable
service provided:
(a) by the AFM; or
(b) to the AFM or on its behalf, including by a person to which
any aspect of the scheme’s management has been delegated.
Comparable services
(6) In relation to each separate charge, the AFM’s charges and those of
its associates for comparable services provided to clients, including
for institutional mandates of a comparable size and having similar
investment objectives and policies;
Classes of units
(7) Whether it is appropriate for unitholders to hold units in classes
subject to higher charges than those applying to other classes of the
same scheme with substantially similar rights.
6.6.22 G When assessing the quality of service provided under COLL 6.6.21R(1):
(1) the AFM should have regard to the quality of service it provides and
the quality of service provided by any person to which any aspect of
the scheme’s management has been delegated or which provides
services to the AFM or on its behalf; and
(2) the AFM’s assessment of quality of service is not confined to
FCA 2018/17
Page 12 of 18
services provided directly to unitholders but may include services
undertaken on their behalf by the AFM, such as consideration of the
quality of the investment process used to make decisions about
managing the scheme property.
6.6.23 E Failure by an AFM to take sufficient steps to address any instance where a
scheme’s charges are not justified in the context of the overall value
delivered to unitholders may be relied on as tending to establish
contravention of COLL 6.6A.2R, COBS 2.1.1R or COBS 2.1.4R as
applicable.
6.6.24 G (1) COLL 6.6A.2R applies to AFMs of UCITS schemes and in broad
terms requires AFMs to act in the best interests of unitholders. In
particular, COLL 6.6A.2R(1) requires AFMs to ensure unitholders
are treated fairly, COLL 6.6A.2R(5) requires AFMs to act in such a
way as to prevent undue costs being charged to any scheme it
manages and its unitholders and COLL 6.6A.2R(6)(b) requires an
AFM to act solely in the interests of the scheme and its unitholders.
(2) COBS 2.1.1R is the clients best interests rule, COBS 2.1.4R(2)
requires a full-scope UK AIFM to act in the best interests of the AIF
it manages or the investors of the AIF it manages and the integrity of
the market and COBS 2.1.4R(3) requires the AFM to treat all
investors fairly.
Independent directors
6.6.25 R (1) An authorised fund manager must ensure that at least one quarter of
the members of its governing body are independent natural persons.
If the AFM’s governing body comprises fewer than eight members,
the AFM must instead ensure that at least two of its members are
independent natural persons.
(2) The authorised fund manager, in appointing an independent member
of its governing body, must determine whether such a member is
independent in character and judgement and whether there are
relationships or circumstances which are likely to affect, or could
appear to affect, that member’s judgement.
(3) The authorised fund manager must take reasonable steps to ensure
that independent members appointed to its governing body have
sufficient expertise and experience to be able to make judgements on
whether the AFM is managing each scheme in the best interests of
unitholders.
(4) (a) Independent members of an AFM’s governing body must be
appointed for terms of no longer than five years, with a
cumulative maximum duration of ten years.
(b) If an independent member is appointed to more than one
governing body within an AFM’s group, the cumulative
FCA 2018/17
Page 13 of 18
maximum duration of ten years referred to in (a) is calculated
by adding the durations of each separate appointment and
discounting periods during which appointments overlapped
to avoid double counting.
(c) In relation to a person who served as an independent director
of an AFM’s governing body before 1 October 2019, the five
year term(s) and cumulative maximum duration of ten years
run from that date.
(5) Independent members are not eligible for reappointment to an AFM’s
governing body until five years have elapsed from the end of the ten
year period referred to in (4).
(6) The terms of employment on which independent members are
appointed must be such as to secure their independence.
6.6.26 G (1) The role of the independent members should include providing input
and challenge as part of the AFM’s assessment of value in
accordance with COLL 6.6.20R. Independent members may be
tasked with additional responsibilities, taking into consideration
remuneration and conflict of interest rules.
(2) A member of an AFM’s governing body is unlikely to be considered
independent if any of the following circumstances exist:
(a) the person is an employee of the AFM or of an affiliated
company or paid by them for any role (other than as an
independent member of the governing body of an affiliated
company or of a body exercising an independent governance
function within the AFM’s group) including participating in
the AFM’s share option or performance-related pay scheme;
or
(b) the person has been an employee of the AFM or of an
affiliated company within the AFM's group (other than
having been an independent member of the governing body
of an affiliated company or of a body exercising an
independent governance function within the AFM’s group) or
of any person to which collective portfolio management of
the scheme has been delegated, within the five years
preceding their appointment to the governing body; or
(c) the person has, or had within the three years preceding their
appointment, a material business relationship of any
description with the AFM or with an affiliated company or
with any person to which collective portfolio management of
the scheme has been delegated, either directly or indirectly;
or
(d) the person has received any sort of remuneration from the
FCA 2018/17
Page 14 of 18
AFM’s group (other than as an independent member of the
governing body of an affiliated company of the AFM or of a
body exercising an independent governance function within
the AFM’s group) within the five years preceding their
appointment; or
(e) the person has a close relative who is an officer or other
senior employee of the AFM or a company within the AFM’s
group.
(3) The expertise and experience required under COLL 6.6.25R(3) may
have been gained through professional experience, public service,
academia or otherwise, and does not need to relate to the financial
services industry.
(4) The effect of COLL 6.6.25R(6) is that a person who serves on the
governing body should be subject to appropriate contractual terms so
that, when acting in the capacity of an independent member of the
governing body, they are free to act in the interests of unitholders
and should be able to do so without breaching their terms of
employment.
(5) An AFM should fill any vacancies that arise within the required
number of independent members on its governing body as soon as
possible and, in any event, within six months.
(6) An AFM should consider indemnifying the independent members of
its governing body against liabilities incurred while fulfilling their
duties as such members.
…
7 Suspension of dealings and termination of authorised funds
…
7.3 Winding up a solvent ICVC and terminating or winding up a sub-fund of an
ICVC
…
Consequences of commencement of winding up or termination
7.3.6 R …
(2) Once winding up or termination has commenced:
(a) COLL 6.2 (Dealing), COLL 6.3 (Valuation and pricing),
COLL 6.6.20R to COLL 6.6.24G (Assessment of value) and
COLL 5 (Investment and borrowing powers) cease to apply
to the ICVC or to the units and scheme property in the case of
FCA 2018/17
Page 15 of 18
a sub-fund;
…
…
…
7.4 Winding up an AUT and terminating a sub-fund of an AUT
…
When an AUT is to be wound up or a sub-fund terminated
7.4.3 R (1) Upon the happening of any of the events or dates referred to in (2)
and not otherwise:
(a) COLL 6.2 (Dealing), COLL 6.3 (Valuation and pricing),
COLL 6.6.20R to COLL 6.6.24G (Assessment of value) and
COLL 5 (Investment and borrowing powers) cease to apply
to the AUT or to the units and scheme property in the case of
a sub-fund;
…
…
…
7.4A Winding up a solvent ACS and terminating a sub-fund of a co-ownership
scheme
…
When an ACS is to be wound up or a sub-fund of a co-ownership scheme
terminated
7.4A.4 R (1) Upon the happening of any of the matters or dates referred to in (3),
and subject to the requirement of (4) being satisfied, and not
otherwise:
(a) COLL 6.2 (Dealing), COLL 6.3 (Valuation and pricing),
COLL 6.6.20R to COLL 6.6.24G (Assessment of value) and
COLL 5 (Investment and borrowing powers) cease to apply
to the ACS or to the units and scheme property in the case of
a sub-fund of a co-ownership scheme;
…
…
…
FCA 2018/17
Page 16 of 18
8 Qualified investor schemes
…
8.3 Investor relations
…
Contents of the annual report
8.3.5A R …
(5) An annual report of an authorised fund must also contain a statement
setting out a description of the value for money assessment required
by COLL 8.5.17R including:
(a) a separate discussion and conclusion for the matters covered
in each paragraph of COLL 6.6.21R, and for each other
matter that formed part of the assessment, covering the
considerations taken into account in the assessment, a
summary of its findings and the steps undertaken as part of or
as a consequence of the assessment;
(b) an explanation for any case in which benefits from
economies of scale that were identified in the assessment
have not been passed on to unitholders;
(c) an explanation for any case in which unitholders hold units in
a class for which the payments out of scheme property in
relation to that class as set out in the prospectus (in this rule,
“charges”) are higher than those applying to other classes of
the same scheme with substantially similar rights;
(d) the conclusion of the authorised fund manager’s assessment
of whether the charges are justified in the context of the
overall value delivered to the unitholders in the scheme; and
(e) if the assessment has identified that the charges are not
justified in the context of the overall value delivered to the
unitholders, a clear explanation of what action has been or
will be taken to address the situation.
(6) An AFM need not include the information required by (5) in its
annual report if it makes the information available to unitholders
annually in a composite report covering two or more of the schemes
it manages, published in the same manner as the annual report.
…
8.5 Powers and responsibilities
FCA 2018/17
Page 17 of 18
…
Application of assessment of value and independent director rules
8.5.16 R COLL 8.5.17R to COLL 8.5.21G apply to an authorised fund manager
(other than an EEA AIFM) of an AUT, ACS or ICVC.
Assessment of value
8.5.17 R (1) An authorised fund manager must conduct an assessment at least
annually for each scheme it manages of whether the payments out of
scheme property set out in the prospectus are justified in the context
of the overall value delivered to unitholders.
(2) In carrying out the assessment required by (1), the AFM must,
separately for each class of units in a scheme, consider at least the
matters set out in COLL 6.6.21R (Table: minimum considerations –
assessment of value).
8.5.18 G The guidance in COLL 6.6.22G applies to interpreting the requirements of
COLL 6.6.21R as applied by COLL 8.5.17R.
8.5.19 E Failure by an AFM to take sufficient steps to address any instance where a
scheme’s charges are not justified in the context of the overall value
delivered to unitholders may be relied on as tending to establish
contravention of COLL 6.6A.2R, COBS 2.1.1R or COBS 2.1.4R as
applicable.
Independent directors
8.5.20 R (1) An authorised fund manager must ensure that at least one quarter of
the members of its governing body are independent natural persons.
If the AFM’s governing body comprises fewer than eight members,
the AFM must instead ensure that at least two of its members are
independent natural persons.
(2) The authorised fund manager, in appointing an independent member
of its governing body, must determine whether such a member is
independent in character and judgement and whether there are
relationships or circumstances which are likely to affect, or could
appear to affect, that member’s judgement.
(3) The authorised fund manager must take reasonable steps to ensure
that independent members appointed to its governing body have
sufficient expertise and experience to be able to make judgements on
whether the AFM is managing each scheme in the best interests of
unitholders.
(4) (a) Independent members of an AFM’s governing body must be
appointed for terms of no longer than five years, with a
cumulative maximum duration of ten years.
FCA 2018/17
Page 18 of 18
(b) If an independent member is appointed to more than one
governing body within an AFM’s group, the cumulative
maximum duration of ten years referred to in (a) is calculated
by adding the durations of each separate appointment and
discounting periods during which appointments overlapped
to avoid double counting.
(c) In relation to a person who served as an independent director
of an AFM’s governing body before 1 October 2019, the five
year term(s) and cumulative maximum duration of ten years
run from that date.
(5) Independent members are not eligible for reappointment to an AFM’s
governing body until five years have elapsed from the end of the ten
year period referred to in (4).
(6) The terms of employment on which independent members are
appointed must be such as to secure their independence.
8.5.21 G The guidance in COLL 6.6.26G applies to interpreting the requirement for
independence in COLL 8.5.20R.
TP 1 Transitional Provisions
TP 1.1
(1) (2)
Material to
which the
transitional
provision
applies
(3) (4)
Transitional provision
(5)
Transitional
provision:
dates in force
(6)
Handbook
provision:
coming
into force
…
48
COLL
4.5.7R(8)
and (9) and
COLL
8.3.5AR(5)
and (6)
R An authorised fund
manager is not required
to include the
information prescribed
by COLL 4.5.7R(8) and
(9) or COLL
8.3.5AR(5) and (6) in
its annual long report or
in a composite report in
respect of any annual
accounting period
ending before 30
September 2019.
From 30
September
2019
30
September
2019
FCA 2018/18
COLLECTIVE INVESTMENT SCHEMES SOURCEBOOK (MISCELLANEOUS
AMENDMENTS) (No 2) INSTRUMENT 2018
Powers exercised
A. The Financial Conduct Authority makes this instrument in the exercise of the
following powers and related provisions in or under:
(1) the following sections of the Financial Services and Markets Act 2000 (“the
Act”):
(a) section 137A (The FCA’s general rules);
(b) section 137T (General supplementary powers);
(c) section 139A (Power of the FCA to give guidance);
(d) section 247 (Trust scheme rules);
(e) section 248 (Scheme particulars rules);
(f) section 261I (Contractual scheme rules);
(g) section 261J (Contractual scheme particulars rules); and
(2) regulation 6(1) of the Open-Ended Investment Companies Regulations 2001
(SI 2001/1228).
B. The rule-making provisions listed above are specified for the purposes of section
138G(2) (Rule-making instruments) of the Act.
Commencement
C. This instrument comes into force on 30 September 2019 immediately after the
changes in Part 2 of the Collective Investment Schemes Sourcebook (Miscellaneous
Amendments) Instrument 2018 (FCA 2018/17) come into force.
Amendments to the Handbook
D. The Collective Investment Schemes sourcebook (COLL) is amended in accordance
with the Annex to this instrument.
Citation
E. This instrument may be cited as the Collective Investment Schemes Sourcebook
(Miscellaneous Amendments) (No 2) Instrument 2018.
By order of the Board
22 March 2018
FCA 2018/18
Page 2 of 3
Annex
Amendments to the Collective Investment Schemes sourcebook (COLL)
In this Annex, underlining indicates new text and striking through indicates deleted text
6 Operating duties and responsibilities
…
6.6 Powers and duties of the scheme, the authorised fund manager, and the
depositary
…
Table of application
6.6.2 R This table belongs to COLL 6.6.1R.
Rule ICVC ACD
Any
other
directors
of an
ICVC
Depositary
of an ICVC
Authorised
fund
manager
of an AUT
or ACS
Depositary
of an AUT
or ACS
6.6.26G x x
x
6.6.27R x x
x
Notes: …
(5) COLL 6.6.20R to COLL 6.6.26G 6.6.27R have a special
application as set out in COLL 6.6.19R.
…
Allocation of responsibility for compliance to an approved person
6.6.27 R (1) An AFM must allocate responsibility for ensuring its compliance
with COLL 6.6.20R, COLL 6.6.25R, and, as applicable, COLL
6.6A.2R or COBS 2.1.4R to an approved person.
(2) Where the chair of the AFM’s governing body is an approved
person, the AFM must allocate the responsibility set out in (1) to that
person.
…
8 Qualified investor schemes
FCA 2018/18
Page 3 of 3
…
8.5 Powers and responsibilities
…
Application of value for money assessment and independent director rules
8.5.16 R COLL 8.5.17R to COLL 8.5.21G 8.5.22R apply to an authorised fund
manager (other than an EEA AIFM) of an AUT, ACS or ICVC.
…
Allocation of responsibility for compliance to an approved person
8.5.22 R (1) An AFM must allocate responsibility for ensuring its compliance
with COLL 8.5.17R, COLL 8.5.20R, and COBS 2.1.4R to an
approved person.
(2) Where the chair of the AFM’s governing body is an approved
person, the AFM must allocate the responsibility set out in (1) to that
person.
44
PS18/8
Appendix 2
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Appendix 2
Final non-Handbook Guidance
Financial Conduct Authority Page 1 of 6
Introduction
1.1 This guidance sets out what we expect from firms that are involved in the transfer of
fund investors from pre-Retail Distribution Review (RDR) unit classes
1
to post-RDR unit
classes. This guidance replaces the guidance in FG 14/4 on the same subject.
1.2 We are setting out our approach as a result of a number of queries from stakeholders
and some evidence of uncertainty in the procedure to adopt when converting clients to
the new unit classes.
Background
1.3 The implementation of the RDR rules on adviser charging
2
and related rules for platforms
have resulted in new unit classes (widely referred to in the industry as ‘clean’ unit
classes) in authorised collective investment schemes. These post-RDR ‘clean’ classes
bear a lower annual management charge (AMC), excluding the portion of the charge that
was formerly rebated to advisers, in line with the RDR ban on commission payments.
1
The term ‘unit class’ is used throughout this document. References to ‘unit’ within the FCA Handbook apply
to both units in an AUT and an ACS and shares in an ICVC. This document shares that referencing, so
references to ‘unit class’ also include ‘share class’ in respect of an ICVC.
2
PS10/6: Distribution of retail investments: Delivering the RDR - feedback to CP09/18 and final rules:
http://www.fca.org.uk/static/documents/policy-statements/fsa-ps10-06.pdf (March 2010)
FG18/3: Changing clients to post-RDR
unit classes
April 2018
Finalised guidance
Guidance consultation
Financial Conduct Authority Page 2 of 6
Finalised guidance
1.4 In the case of platforms, Policy Statement 13/1
3
referred to the introduction of clean unit
classes and announced the banning of payments to platforms from product providers.
These particular rules came into force on 6 April 2014 for new business, with the rules for
legacy payments coming into force on 6 April 2016. Changes to ‘legacy’ business require
platforms to have access to clean unit classes or to be able to pass on any continuing
payments they receive from providers
4
to clients in full in the form of small cash rebates
or unit rebates (COBS 6.1E.10R and 6.1E.11G).
1.5 A rule and guidance, setting out how the rules made in April 2013 apply to legacy
business in relation to cash rebates to clients, were made on 27 February 2014 and came
into force on 6 April 2014 (the same date as the rules made in April 2013).
5
1.6 We have found that there is some uncertainty over whether a conversion to a clean unit
class should be treated in the same way as a switch involving cancelling the existing
units and issuing new units. Questions have also arisen about
• whether conversions can happen in bulk rather than individually
• if conversions can happen without the express consent of the client
• whether advice is needed
• the role of advisers in the conversion process, and
• whether a new disclosure document (e.g. a Key Investor Information Document
(KIID) for a UCITS scheme) needs to be issued to the client before conversion.
1.7 This guidance answers these questions.
‘Converting’ unit classes
1.8 Various mechanisms exist to facilitate the move from one unit class to another. It is our
understanding that in most cases, the move to clean unit classes will be accomplished by
converting units (replacing one unit with another of a different unit class). The holder of
the units has a right to request conversion from one class to another, as established in
COLL 6.4.8R. The AFM may have a right to require the unitholder to convert to another
class if certain conditions are met, as explained below.
1.9 We would expect the AFM, when undertaking a unit conversion, to have regard to the
relevant tax regulations. Under those regulations
6
, an exchange of units in a single
3
PS13/1: Payments to platform service providers and cash rebates from providers to consumers:
http://www.fca.org.uk/static/documents/policy-statements/ps13-1.pdf (April 2013)
4
Reference to payments from providers to platforms in this guidance do not include payments by providers to
advisers in the form of trail commission or facilitated adviser charges, as the platform simply acts as a conduit
for these payments to advisers. The payments banned from 6 April 2014 were those payments previously paid
by the provider and retained by the platform.
5
Instrument 2014/16 - http://media.fshandbook.info/latestNews/FCA_2014_16.pdf . Feedback on the replies to
the consultation in CP13/9 is contained in Handbook Notice 9:
https://www.fca.org.uk/publication/handbook/fca-handbook-notice-09.pdf
Guidance consultation
Financial Conduct Authority Page 3 of 6
Finalised guidance
transaction might have capital gains tax implications, but this will not usually be the case
where the client receives only new clean units of the same fund with the same rights as
before but a different AMC.
Conversion procedures for nominee arrangements
1.10 We would expect any AFM or other firm (e.g. platforms or discretionary investment
managers) undertaking or facilitating the conversion of units to clean unit classes (and
any firms providing advice to clients regarding conversions) to consider a number of
points before proceeding, as set out below.
Client’s best interests rule and Principles for Businesses
1.11 COBS 2.1.1R (1) (the ‘client’s best interests rule’) in the FCA Handbook states:
‘A firm must act honestly, fairly and professionally in accordance with the best interests
of its client (the client’s best interests rule).’
1.12 It is our view that under this provision and Principle 6 of the Principles for Businesses, a
conversion initiated by the AFM, platform or other intermediary acting on behalf of a
client should normally take place only if it is fair and in the client’s best interests.
1.13 This would normally be the case where the clean unit class is exactly the same as the
pre-RDR class, except for a reduced AMC. However, it is possible that this may not be the
case if the reduced AMC, combined with any new platform charge (or other charges), will
lead to an overall increase for clients. It is also possible, depending on the charging
structure, that some clients may be better off and others worse off.
1.14 For retail clients, ‘clear’ disclosure of the platform charge is required in any event by
COBS 6.1E.1R, which came into force on 6 April 2014.
Prior notification of a proposed conversion and treatment of investments where the
client objects to conversion
1.15 To mitigate the risk that some clients may be worse off, firms should ensure in all cases
that clients have sufficient notification of, and information on, the proposed conversion to
enable them to seek advice or make an informed decision on whether to transfer their
investments to another platform.
7
The notification should include information on whether
there is likely to be an overall increase in charges for clients, as a result of the reduced
AMC combined with the new platform charge (or other charges).
6
The Collective Investment Schemes (Tax Transparent Funds, Exchanges, Mergers and Schemes of
Reconstruction) Regulations 2013, SI 2013/1400
7
Under COBS 6.1G.1R, such transfers must take place when requested by the client ‘within a reasonable time
and in an efficient manner’.
Guidance consultation
Financial Conduct Authority Page 4 of 6
Finalised guidance
1.16 If a client objects to the conversion, their investments can continue to be held in the
bundled class if the AFM is willing to continue to offer this option. However, payments
from providers that (prior to 6 April 2016) were retained by the platform now have to be
passed to the client in full, in the form of small cash rebates or unit rebates. If a nominee
does not intend to offer clients the option of remaining in pre-RDR classes and receiving
unit rebates, it should be made clear to the client that this is not an option open to them.
Approach to be adopted by nominees
1.17 A ‘unitholder’ is defined in our Handbook
8
as ‘the person whose name is entered on the
register (of unitholders)’. When the underlying investor uses an intermediary such as a
platform, that firm’s nominee is the registered holder of the units, so the COLL rules
permit the nominee to exercise any right to convert from one class to another.
1.18 We expect nominees to ensure the client is given prior notification that the conversion
will take place and is given sufficient time to consider other options. For example, the
notification could state that the conversion will take place unless the client objects within
a reasonable specified timeframe (where retaining the current class is offered as an
option) or notifies the firm that they wish to sell their investments or transfer to another
platform. Such a notification should be made in a manner appropriate to the nominee’s
ongoing dealings with the client. For example, if a nominee deals with the client primarily
by electronic communication, such as email, the notification should be made by this
method.
1.19 Nominees should bear in mind any notification, disclosure or other contractual
requirements that may exist in their contractual relationship with the client or the client’s
chosen financial adviser, concerning the nominee arrangements. This guidance contains
our position on conversions, but firms should also bear in mind that the conversion will
also be subject to any contractual arrangements firms have agreed with the underlying
investor.
Conversion procedures for direct unitholders
1.20 The COLL rules envisage authorised fund managers undertaking a mandatory conversion
of units if
• the circumstances in which mandatory conversions will take place are set out in the
prospectus of the fund
9
, and
• the client’s best interests rule is satisfied.
10
1.21 If the prospectus does not refer to mandatory conversion, the AFM can amend it to allow
such conversions of units. The AFM would need to consider how this change to the
8
http://fshandbook.info/FS/glossary-html/handbook/Glossary/U?definition=G1233 .
9
COLL 4.2.5R 5(d)
10
COBS 2.1.1R (1) and PRIN 6
Guidance consultation
Financial Conduct Authority Page 5 of 6
Finalised guidance
prospectus would be treated under COLL 4.3 (Approvals and notifications) to ensure
unitholders were properly informed about possible mandatory conversions in future.
1.22 To satisfy the second condition, we expect AFMs to send the relevant unitholders a
notification of the planned mandatory conversion, with a notice period of reasonable
length (not less than 60 days), to enable them to redeem their units if they do not wish
to be converted and to alert them to alternative options, if available.
1.23 The AFM can proceed with the conversion if:
• by the end of the notice period, it has not received alternative instructions about the
units affected by the proposed conversion, and
• the AFM is satisfied on reasonable grounds, having considered, in particular, the costs
to unitholders associated with the old and new classes of units, that the conversion
will not result in detriment to the unitholders concerned.
1.24 An AFM should not make other changes to investors’ rights as part of a mandatory
conversion to a cheaper but otherwise identical class.
Advice on conversions
1.25 Some questions have focused on whether a conversion would constitute advice. For
nominees, issuing a notification that a clean unit class exists to which it is proposed to
convert all existing clients’ holdings, explaining (where this is the case) why it is in the
client’s best interests, does not constitute advice.
1.26 For the AFM, notification to direct unitholders that a clean unit class exists (without a
specific recommendation to convert to that class) does not constitute advice. Similarly,
prior notice of a mandatory conversion is not advice. If the client is given such a
notification, they then have the option to seek advice on the matter.
Advisers and their role in the conversion process
1.27 If the client is investing in a fund as a result of the recommendation of a financial adviser
and that relationship still exists, then that adviser may have a role to play in the
conversion process.
1.28 Legacy payments to platform providers came to an end in April 2016 (unless passed on
in full to clients in the form of small cash rebates or unit rebates).
1.29 Additionally, we would encourage platforms and product providers to engage with a
client’s financial adviser in good time when considering converting holdings to clean unit
classes, so the financial adviser has an opportunity to discuss the conversion with their
client as appropriate.
Guidance consultation
Financial Conduct Authority Page 6 of 6
Finalised guidance
Providing a new disclosure document when converting to clean unit classes
1.30 There have been some questions about whether a conversion from a pre-RDR unit class
to a clean unit class requires a new disclosure document, such as the KIID, to be
provided to the client for the new unit class under COBS 14.2.1R(7).
1.31 Where the move to clean unit classes will be accomplished by conversions, we consider
that a new disclosure document, such as a KIID, would not need to be provided as long
as
• the firm has taken reasonable steps to assess whether the conversion is in line with
the client’s best interests rule and Principle 6 of the Principles for Businesses (treating
customers fairly)
• in all cases where the conversion is initiated by the AFM, platform or other nominee,
the client has been given sufficient notification of, and information on, the proposed
conversion to enable them to seek advice or make an informed decision on whether
to transfer their investments to another platform
• the notification includes information about whether there is likely to be an overall
increase in charges for clients, as a result of the reduced AMC combined with the new
platform charge (or other charges), and
• clients are given the option to request the KIID for the clean unit class, or advised
how they can access the document electronically.
45
PS18/8
Appendix 3
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
Appendix 3
An overview of all AMMS remedies
Remedies to give
protection to investors who are less able
to nd better value for money
A: Strengthening the
duty on fund managers
to act in the best
interests of investors
and introduce scrutiny
of this
A: Proposing to reject the
undertakings in lieu
of a market
investigation reference to the CMA
on investment consultancy services
and seek views on this proposal.
Make a �nal decision on making this
market investigation reference to the
CMA in September 2017
B: Recommending the
Treasury considers
bringing investment
consultants into the
FCA’s regulation,
depending on the
outcome of the provisional
market investigation
reference to the CMA
C: Launching a
market study into
investment
platforms
shortly
A: Supporting the
disclosure of a single
all-in fee to investors
B: Supporting consistent
and standardised
disclosure of costs and
charges to institutional
investors
C:
Chairing a working group to
provide investors with clearer
and more useful objectives.
Consulting on how
benchmarks are used
and performance is
presented
D: Recommending that
the DWP remove
barriers to pension
scheme consolidation
and pooling
B: Requiring fund managers
to return risk-free box
pro�ts to the fund and
disclose box management
practices to investors
C: Making it easier for
fund managers to
switch investors to
cheaper share classes
Remedies to drive competitive pressure on asset managers
P
roposal to improve intermediaries’ eectiveness
1
2
3
1. AMMS remedies in Final Report
46
PS18/8
Appendix 3
Financial Conduct Authority
Asset Management Market Study remedies and changes to the handbook
1: 
A, B & C
2: 












A
B
C
D
3: 









A
B
C
2. Update to AMMS remedies
© Financial Conduct Authority 2018
25 The North Colonnade Canary Wharf London E14 5HS
Telephone: +44 (0)20 7066 1000
Website: www.fca.org.uk
All rights reserved
Pub ref: 005558