The Financial Conduct Authority has ordered asset managers to provide clearer information on fund objectives and benchmarks, to help improve competition in this sector.
The new rules are a result of its Asset Management Market Study (2017). This is its second policy statement to arise from this review. It has already previously demanded greater transparency on charges.
Despite previous opposition from the industry, the FCA is calling for a significant shake up in the way asset managers use benchmarks, with fund managers expected to set out why a fund uses a particular benchmark as a gauge of performance.
This is to address concerns that some fund may use low-returning benchmarks, such as cash to make their performance look more impressive.
However, the regulator stepped back from making benchmarks mandatory. Instead it said funds that don’t have a set benchmark need to make clear how investors can assess the performance of the fund.
Publishing its new rules and guidance the FCA says: “We have found that fund managers rarely explain why or how they are using particular benchmarks.
“We expect fund managesr to explain what their funds are doing in consumer-friendly language.”
The benchmark requirement will come into force on May 7 2019 for new funds, and from August 2019 for existing funds.
The new rules on better price disclosure – which were initially proposed last April – will come into effect in September 2019.
Aegon’s pensions director Steven Cameron says: “ It’s crucial that as an industry, both asset managers and the wider savings and investment industry help individuals understand their investment options.
“That’s whether in a workplace pension considering issues like alternatives to default funds or those moving into retirement considering how to invest during drawdown.
“Setting out fund objectives on financial and non-financial matters in clear and simple language will encourage more customers to engage and to make informed decisions.
Investing in a fund with the right objectives can be as or more important than charges in getting a good outcome and value for money. Of course, many investors will continue to need professional advice to make sure they are invested appropriately to meet their personal circumstances and savings objectives.”
The Investment Association chief executive Chris Cummings says the trade body is “committed to increasing transparency and promoting clearer language across the asset management industry”.
Meanwhile AJ Bell’s chief investment officer, Kevin Doran says that drive to provide greater clarity about fund objectives should be extended to cover managed portfolio services as well.