Investor Event

FCA, AFMs, ACDs, High fees for inappropriate products, Closet indexers

This blog gives you the latest topical news plus some informal comments on them from ShareSoc’s directors and other contributors. These are the personal comments of the authors and not necessarily the considered views of ShareSoc. The writers may hold shares in the companies mentioned. You can add your own comments on the blog posts, but note that ShareSoc reserves the right to remove or edit comments where they are inappropriate or defamatory.

By Cliff Weight, Director, ShareSoc. These are my personal views and do not necessarily reflect the views of ShareSoc.

The FCA has published two reports in a week that highlight the historic failings of the fund management industry and are hugely critical.

According to Wealth Manager “In a damning report, the watchdog said fund houses have failed to properly assess the value of their funds.” see

It is a good report with many sensible suggestions. It should have been done 5 years ago immediately after the 2016 FCA report on the asset management industry which highlighted that consumers were being sold inappropriate products with high fees. But better now than not at all.

The proposed timescale for the next review of the impact of the proposed recommendations, in 12 to 18 months, is far too long.
The FCA should send out a questionnaire in 3 months time asking what actions boards have taken in the light of this report. A short survey monkey approach will highlight if the significant changes required are being acted upon.

A good review of the report is here:

The full report is here: 

The other FCA report was equally damning.

The FCA found that, while some firms were operating well, others did not meet FCA standards. The FCA found weaknesses in governance structures, conflicts of interest management and operational controls.  The FCA also found some firms referring to funds as if they were solely operated by delegate third-party investment managers or fund sponsors rather than themselves, and a lack of focus on controlling the risk of harm from investors exposed to inappropriate or poor value products.  The review focussed on host AFMs but some of the findings are also applicable to in-house AFMs.   Sheldon Mills, Executive Director, Consumers and Competition at the FCA said: ‘Authorised Fund Managers play an important role as fund operators and we want to ensure they contribute to a thriving investment management industry. Our review indicates that some firms are not sufficiently meeting FCA standards and we want to see significant improvement in this area. We expect firms to look at the key findings on governance structures, conflicts of interest, operational controls, and the other areas highlighted in our review and take action. We will take action if we find issues in firms’ responses to our findings. Our focus on this sector will aim to ensure that the regulatory framework is in the right place to provide good value for investors balanced by appropriate protections, and we will consider whether we need to make changes to rules to supplement the work of this review and its findings.’All authorised funds in the UK are required to have an AFM, who is responsible for ensuring that the fund complies with the FCA rules.

Firms which operate effectively typically are well capitalised and well-resourced, with senior management recognising and controlling the conflicts of interest inherent in the business model. The FCA will provide written feedback to all firms in the review and a small number will be required to undertake section 166 Skilled Person reports to improve compliance. The FCA will review the progress each firm has made in 12-18 months. Firms may also be asked to hold additional capital to guard against the risks they have in their business. The FCA is also conducting further work to identify whether changes are needed to the regulatory framework that firms operate under. This could include rule changes. (my bolding.)

The full FCA report is available here: 

Although the report did not mention Woodford, the FT did in its write up “FCA calls for stronger controls on funds after Woodford debacle – Lax oversight highlighted in review into host-authorised fund managers”:

Regulators have revealed lax oversight and governance at companies responsible for protecting investors’ money at many UK funds in a probe launched after the collapse of Neil Woodford’s fund. The review by the Financial Conduct Authority (FCA) focused on what are called host-authorised fund managers (AFMs), companies with a vital but often overlooked role in the industry as low-profile fund overseers. Host AFMs are legally responsible for running funds, but delegate the investment management to third-party fund managers.  The crucial importance of these fund-runner companies in protecting customers was thrown into sharp relief by the collapse of Woodford’s flagship fund in 2019, which trapped 300,000 investors and £3.7bn. Burnt investors plan to bring several lawsuits against Link Group, the UK’s largest independent provider of AFM services, arguing that the company failed in its responsibility to supervise Woodford and protect investors’ cash.  The FCA’s review report makes no mention of the Woodford debacle, but is seen in the industry as part of the regulator’s response to the scandal. It began in late 2019 months after the Woodford fund’s collapse drew attention to fund overseer companies.

FCA seem to be putting the cart before the horse?

Whilst I welcome both of these reports and the FCA’s apparent improvement since Charles Randell became Chair, I still think much more needs to be done.

How can they decide new approaches without publishing one of the key sources of evidence of the need for change? There is still no FCA report on the FCA Woodford debacle, but the FCA have published 2 reports on what should be done differently.

Closet Indexers

On a related note, readers may be interested to know that I have written again to the FCA asking for a meeting to discuss closet indexers and I have high hopes that a class action against a long term offender may be launched alter this year. If the FCA will not hold offenders to account then others needs to do so.


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