New rules and guidelines are shortly to apply to the objectives that funds in the UK pursue and the benchmarks that their managers use. These are the result of a long enquiry by the Financial Conduct Authority into the asset management market.

In a report it published in 2017, the regulator complained about weak price competition in the asset management sector. Last April, it published rules to improve the governance of funds by moving them to better share classes and ensuring a fairer allocation of dealing profits. These come into force on 1 April this year (on risk free box profits) and 30 September (on value assessments and independent directors). Policy Statement 19/4, just released, contains more remedies. The FCA hopes that it will make it easier for investors to choose the best funds for themselves and reach the objectives that they have for their investments.

Fund objectives

New "non-handbook guidance for consultation" calls for fund managers to explain what their funds are doing in consumer-friendly language. Fund objectives and policies (statements about the things that a fund aims to achieve, the things in which it can invest and any limitations on its investments) are too blurry at the moment and the regulator wishes to improve them because consumers rely on the information they contain when comparing their investment options.

Performance fees

Rule 6.7.6A now says that any performance fee specified in the prospectus must be calculated on the basis of the scheme’s performance after deduction of all other payments out of scheme property. This comes into force on 7 August.

All performance fees should be specified in prospecti and should be consistent with COLL 6.7.4R, part of the FCA's rulebook that deals with collective investment schemes. This dictates that the only payments that may be recovered from the scheme property of an authorised fund are those in respect of the administration of the fund, or the investment or safekeeping of the scheme property, or remuneration for the people who operate the fund.

Benchmarks

The FCA is also keen to require fund managers who use benchmarks to refer to them consistently throughout the documents that pertain to each fund. It also wants to require each fund manager who presents a fund’s past performance to do so against each benchmark he has used as a constraint on portfolio construction or as a performance target.
 
The new rules, which come into force on 7 May in respect of a fund that is authorised on or after that date, and on 7 August for every fund that is authorised before 7 May, obviously including any fund that exists today, do not apply in relation to the form or content of a European Union key investor information document or KIID, an EEA key investor information document or a NURS-KII document. Rule 4.5.12 will oblige an authorised fund manager to include in any communication about an authorised fund: (1) a short explanation, in terms consistent with the relevant prospectus, of the choice and use of every (i) target benchmark, (ii) constraining benchmark or (iii) comparator benchmark used in relation to the scheme; or (2) a statement that says that the prospectus does not refer to a benchmark, along with a short explanation of how investors can assess the performance of the scheme.

The FCA thinks that investors will understand the aforementioned three categories of benchmark. When a fund manager does not explicitly manage a portfolio in line with a benchmark, the FCA reasons, there may still be cases where other factors, such as internal restrictions or the remuneration policy, ensure that the fund is effectively managed with reference to a benchmark. The FCA, however, knows that some managers dispense with benchmarks altogether.

The three categories of benchmark are explained in COLL 4.2.5R(3)(c-b). A ‘constraint’ is an index that a fund manager uses to limit or 'constrain' the way in which he constructs a fund’s portfolio. A ‘target’ is an index that is part of a target that he has set for the fund’s performance to match or exceed, which includes anything he uses to calculate performance fees. A ‘comparator’ is an index against which he invites investors to compare the fund’s performance.