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FCA’s Asset Management Market Study – remedies and changes to the handbook – Feedback and final rules

FCA’s Asset Management Market Study – remedies and changes to the handbook – Feedback and final rules
  • United Kingdom
  • Financial services and markets regulation
  • Financial institutions



On 5 April 2018 the FCA issued their long awaited first set of rules and remedies under the Asset Management Market Study.

Policy Statement (PS18/8)Asset Management Market Study remedies and changes to the handbook – Feedback and final rules to CP17/18” sets out the FCA’s position on the issues which have been well discussed in the industry since the Final Report was released last year.

The PS focusses on the duties of authorised fund managers to act as the agents of investors and each of the new rules is covered in more detail below.

Also on 5 April, the FCA published Consultation Paper (CP18/9)Consultation on further remedies – Asset Management Market Study” setting out proposed rules intended to improve fund disclosures for consultation. These proposed rules focus on: fund objectives and investment policies; the use of benchmarks; and the calculation of performance fees. These are also considered in more detail below.

Policy Statement PS18/8

Overall value delivered (previously value for money)

The FCA reiterates in the Policy Statement (“PS”) its view that authorised fund managers (“AFMs”) do not robustly consider the value they offer to investors, and that this leads to investor harm. The FCA retains its core thinking from the Final Report that agents, ie AFMs, should be accountable to clients on how they deliver value.

However, the FCA has conceded that the rules should not focus only on cost, but should also take into account the whole value proposition and the amended, now final, rules reflect this.

COLL 6.6.20R has been redrafted to implement this requirement and now provides for an annual assessment of value of each scheme managed, which should consider whether the payments made from scheme property are justified in the context of the overall value delivered to investors. Crucially, AFMs should consider the following non-exhaustive list of factors against each unit class in a scheme:

  • the range and quality of service
  • the performance of the scheme after the deduction of all payments
  • the cost of providing services
  • whether economies of scale can be achieved taking into account the value of the scheme and whether it has grown or contracted
  • comparable market rates for each service provided
  • comparable services provided by the AFM or any delegate (including institutional mandates)
  • differing charges between unit classes and whether it is appropriate for investors to be in a particular class

The new rules are very similar to the Gartenberg standard in the US. These are derived from a 1982 case, which set out a number of relevant factors to be considered in relation to whether mutual fund adviser’s fees are excessive and establish that price is not the only factor. It will be crucial for firms to consider the process by which they implement this change and the factors which are relevant to each particular fund they manage, which may differ between schemes or even between classes.

In our view, AFMs should also consider, taking into account the FCA’s views on acting in the best interests of investors, that the factors which are applied to each class may differ year on year as the fund changes. AFMs will need to be able to demonstrate that this has been considered.

Implementation date: 30 September 2019

Independent directors

The proposal to introduce independent non-executive directors (“INEDs”) was generally well supported by the industry, despite some concerns that this might be an overly burdensome requirement for start-up or smaller AFMs. However, the FCA is clear that the benefits of independent scrutiny should be enjoyed by all investors, no matter the size of the business they are investing with. Moreover, the FCA is of the view that the measure of independence in the formative years of a business are crucial in shaping both strategy and culture.

As such, a new rule (COLL 6.6.25R) sets out that AFMs must ensure that at least one quarter of members of the governing body are independent and, if the body comprises 8 members or fewer, the AFM must instead ensure that at least two of its members are independent. The guidance and requirements on independence are detailed but, in all material respects, are as set out in the Final Report.

The FCA makes clear that the INEDs should have a role providing input and challenge to the value for money assessment.

Implementation date: 30 September 2019

Prescribed Responsibility

The Prescribed Responsibility is to be implemented as part of the extension of the Senior Managers and Certification Regime (“SM&CR”) and is intended to make clear that a Senior Manager (usually the chair of the AFM’s board) must take reasonable steps to ensure that the firm complies with its obligations to carry out an assessment of overall value, the duty to recruit independent directors and the duty to act in the best interests of fund investors.

The FCA has clarified, however, that it will remain for firms to decide as part of this whether or not to appoint an independent chair.

Implementation date: The rules will come into effect at the same time as the rules extending the SM&CR in general, expected to be mid to late 2019.

Box profits

The FCA has confirmed that they will require managers of dual-priced authorised funds which make a risk-free profit when dealing as principal to repay these to the fund for the benefit of investors. The FCA has, however, made some adjustments to the original proposal to ensure technical accuracy and also to allow for some flexibility in how risk-free profits should be allocated fairly and in the interests of investors. The key adjustments the FCA has made in the final rules are:

  • the profits need not necessarily be returned to the fund – AFMs may also allocate these fairly by paying them to individual investors who have bought or sold units;
  • to recognise situations where risk-free profits are offset by losses on some transactions, when the dealing spread is narrower than the maximum spread permitted; and
  • to change the frequency for making payments to the fund.

The FCA acknowledges that operational complexities will remain but that, overall, the changes are required to ensure good customer outcomes.

The FCA has also given some welcome clarification as to the depositary’s role in overseeing box profits.

Implementation date: 1 April 2019

Share Class conversions

The ability to convert shareholders to a more appropriate (cheaper) class was widely welcomed by the industry and the FCA has, as expected, issued guidance to make this a much simpler process. Gone is the requirement to obtain consent from each shareholder – instead the change can be carried out on 60 days’ notice to investors. However, any such conversion should normally take place only if it is fair and in the best interests of relevant investors. Any renewal commission arrangements still in place would also need to be considered.

The FCA has additionally confirmed that depositaries are not required to check the merits of a proposed conversion but would be required, under the normal rules, to ensure that it meets the terms of the prospectus.

Although a simpler process, it is crucial that AFMs have the power to carry out compulsory conversions in their scheme documents. Clients should note this requirement when considering any conversions, as including this power requires FCA approval. As it is not something which has previously been permitted, it is unlikely that this provision will be included in existing scheme documents.

We have already been advising clients in this regard and would suggest that, where possible, this approval for this power be included in any upcoming FCA applications.

Implementation date: 5 April 2018

Fund managers as agents

As part of PS18/8 the FCA has confirmed a package of measures which the FCA describes as strengthening the duty on authorised fund managers to act as good agents for their underlying investors. This echoes the comments of the Upper Tribunal in Arch Financial Products LLP, Robin Farrell and Robert Addison v The Financial Conduct Authority [2015] UKUT 0013 (TCC):

Although there does not appear to be any authority directly on the point … an investment manager with discretionary investment powers on his client’s behalf is in a fiduciary position. In any event, the investment manager/client relationship is but one example of a principal/agent relationship which it is well established gives rise to fiduciary duties.”

For the FCA’s new rules, however, the “good agent” principle is more a regulatory than a legal concept and the boundary between legal and regulatory duties here remains to be fully worked out. The FCA has not sought to impose a general fiduciary obligation on managers analogous with the statutory duty which arises from, for example, section 206 of the US Advisers Act.

Consultation Paper CP18/9


In CP18/9 “Consultation on further remedies – Asset Management Market Study”, the FCA seeks to deliver improved fund disclosures by proposing to:

  • publish guidance reminding AFMs how they should express fund objectives and investment policies to make them more useful to investors. Firms should, when describing the objectives of their funds:
  • explain clearly what they are looking to achieve and how
  • explain the constraints that the fund’s portfolio construction may be under
  • explain any non-financial objectives they have, for example the environmental or social objectives of an investment, and how they will measure and report progress against these objectives
  • make new rules so that AFMs must explain why they use benchmarks, or if they do not, how investors should assess the performance of the fund
  • require that, if an AFM uses benchmarks, the benchmarks must be referenced consistently across the fund’s documents and, wherever the AFM presents the fund’s past performance, benchmarks used as a constraint on portfolio construction or as a target must be presented alongside the past performance
  • amend the performance fees rules to provide that performance fees must be calculated on performance net of other fees in all cases

Comments on CP18/9 should be submitted by Thursday 5 July 2018 using the form on the FCA website that can be found here.


The impacts of the PS and CP18/9 are wide ranging for the asset management industry, particularly in relation to governance and assessment of overall value delivered as these are new areas for AFMs.

  • New policies and procedures will need to be put in place around governance as well as a project to assess the approach to appointing and deploying INEDs
  • Prospectuses will need to be updated to reflect board changes and the disclosures required around box profits with regard to CP18/9

Many firms are undertaking projects already in light of the FCA’s Thematic Review TR16/3 “Meeting investors' expectations” and it will be important for firms to feedback on the CP to ensure that their concerns are identified.

Further FCA resources

FCA market study MS15/2.3 “Asset Management Market Study - Final Report” can be found here.

FCA consultation paper CP17/18 “Consultation on implementing asset management market study remedies and changes to Handbook” can be found here.

FCA consultation paper CP18/9 “Consultation on further remedies – Asset Management Market Study” can be found here.

FCA final guidance FG18/3 “Changing clients to post-RDR unit classes” is set out as Appendix 2 to PS 18/8, see pp 44-51.

Previous eBriefings

Our previous eBriefings on AMMS include:

Our previous eBriefings on SM&CR include:

How can Eversheds Sutherland help?

Our in depth understanding of the sector and experience with the practical implementation of new governance arrangements, means that we are very well placed to guide you through the implementation process, and next steps. We are already advising clients in relation to many of the areas covered in the PS and CP18/9 and in the implementation of the SM&CR. We can also offer bespoke training on the issue raised for the asset management industry.