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The UK FCA’s review of AFM’s assessments of value for asset managers

  • United Kingdom
  • Financial services and markets regulation
  • Investment funds and asset management


The findings of the recent FCA multi-firm review of Authorised Fund Managers’ Assessments of Value are less than effusive.  There is much for AFMs to consider and little time in which to consider it.


The FCA set out to review firms’ implementation of its assessment of value (“AoV”) rules, introduced in September 2019.  It concluded that “most of the AFMs we reviewed had not implemented AoV arrangements we expect to be necessary to comply with our rules.  Many had not implemented assessments meeting the minimum consideration requirements and several practices fell short of our expectations.”

Furthermore, some independent directors “did not provide the robust challenge we expect from them and appeared to lack sufficient understanding of relevant fund rules”.

Principal Associate Katie Taylor comments,

“This is a damning review from the FCA, essentially asking the majority of managers to re-think how they carry out these assessments.  This was, however, the “first go” since the rules have come in and it will take time for the industry to find its feet and establish consistent market practice.  There is much to take away from the report and the lack of initial clarity has been acknowledged by the FCA.  With the results of the report and a push from the industry to deliver best practice, there should hopefully be momentum to deliver the quality and consistency the FCA have demanded.”

Summary of the requirements and findings

COLL 6.6.20 R (1) and (2) require an assessment, for each class of shares, at least annually, of whether the payments from the scheme property are justified.  This assessment must consider the minimum considerations set out in COLL 6.6.21 R.  We consider each of these considerations, along with the FCA’s findings in respect of them and the remedial actions which ought to be taken by the AFMs concerned. 

Minimum consideration


FCA findings

Remedial action

Quality of service

The range and quality of services provided to unitholders

“Many firms considered the quality of the investment process as part of this consideration.  Some … judged the investment process through the lens of performance only.” 

Given that fund selectors typically review the quality of an investment process in tandem with the performance this process generates, the FCA’s view is that AFMs ought to do the same.


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.

Some firms assess gross performance rather than net performance, or assess net performance for just one unit class.

Some firms comprehensively review their funds’ stated investment objectives and revise these for funds that are actively managed and use a comparator benchmark and change them from an absolute return, ‘capital growth’ objective to an objective of outperforming the comparator benchmark.  The FCA views these firms as correctly aligning their funds’ stated investment objectives with the active-management investment policies and strategies they use.

AFM costs – general

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.

The FCA thought that many firms incorrectly implement their requirements, simply comparing total fund charges with those of their competitors.

Fees and charges should be considered in the context of specific costs incurred by the AFM.

Economies of scale

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.

The FCA acknowledged that most firms recognise the scope for economies of scale at fund and firm level, but complained that some have made little progress developing a methodology for measuring these economies or else had failed to demonstrate how their modelling has been used in Board discussions.


Economies of scale should be assessed at fund level, using a methodology that captures the granular detail of cost allocation, and the conclusions of this exercise should be considered at Board level.

Comparable market rates

In relation to each service, the market rate for any comparable service provided:

by the AFM; or

to the AFM or on its behalf, including by a person to which any aspect of the scheme’s management has been delegated.

If firms exclude higher-charging unit classes from their assessments, or if they consider just one unit class, there is a risk of overlooking the potential for fee cuts.

Each unit class should be subjected to an assessment of comparable market rates.

Comparable services

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.

The FCA reported that some firms do not compare fund charges with those of segregated mandates, and some do not consider whether additional fees paid by authorised funds versus those paid by segregated mandates could be justified by the complexity of additional service levels. 

Firms should perform a thorough comparison of the rates charged by affiliates for asset management services and implement fee break points within agreements so fund fees are cut in line with the terms agreed for similar, segregated mandates.

Classes of units

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.

The FCA decided firms are too quick to assume that investors are in the appropriate unit class based on the size of their investment and the distribution channel used to sell the firm to them. 


Firms should justify fees at unit class level and utilise an AMMS remedy to switch investors in bulk to cheaper unit classes where there is no obvious reason why they should continue paying more to be in their current unit class.



Next steps: remediation


The FCA expects “to find firms fully complying with our rules when we next review them” with a threat that they will use their full arsenal of “regulatory tools” if this is not the case.  Given that the FCA’s next planned review is in 12 to 18 months’ time, AFMs have limited time to revise their AoV arrangements and instigate the significant remedial changes the FCA envisages.  However, there is now hopefully far more of a framework in place and it is interesting to see that the FCA have encouraged managers to look at the reporting of their peers.  This should in turn lead to consistency of approach over time and an overall improvement in the quality of reporting.


How Eversheds Sutherland can help


Eversheds Sutherland has an excellent relationship with the FCA and a proven track record assisting AFMs with their regulatory requirements.  With our Konexo compliance team we have previously worked with managers on all aspects of the AoV process and can consider any necessary adjustments to your AoV reporting with you.


We also work on these reports with Konexo, our provider of alternative legal and compliance services. For more information on how Konexo can support your business, please contact Simon Collins.



For more information on the implications of this review and how this affects you, please get in touch.


Michaela Walker


Julian Brown


Katie Taylor


Simon Collins


Thomas Pritchard