Assessment of Value (AoV) Review: Implications for AFMs and Investors in the Financial Industry

On the 10th of August of 2023, the FCA shared its latest review of the assessment processes used by Authorised Fund Managers (AFMs) to evaluate the value of the funds they manage. This is a continuation of their previous review from July 2021.

Background:

The FCA’s Collective Investment Schemes sourcebook (COLL) mandates that AFMs conduct a yearly Assessment of Value (AoV), make their findings public, and include independent directors on their boards. Initiated in September 2019, these regulations were the outcome of the FCA’s Asset Management Market Study in June 2017. Specifically, AFMs must ensure that a fund’s fees align with the value it offers, considering at least seven criteria listed in COLL 6.6.20.

Understanding the Assessment of Value (AoV) Process:

The review found that many AFMs had not fully implemented arrangements meeting the FCA’s standards during the initial review in 2020/21. However, the latest review shows that a significant number of AFMs have now integrated considerations on AoV into their processes. This integration has resulted in changes in fees and charges, ultimately leading to cost savings for consumers.

Improvements in AFM Practices:

One notable improvement is that AFMs are making fewer assumptions and taking remedial action when poor value is identified. This includes a reduction in fund fees, which is a positive outcome for investors. Additionally, AFMs are presenting higher quality management information (MI) to the AFM Board. However, it is concerning that some boards are not fully taking into account this improved MI in their conclusions.

Market Failures and Barriers to Fee Reduction:

Despite the improvements, the review identified some persistent issues. Fund charges continue to cluster around certain price points, indicating a market failure. This raises concerns about the lack of competition and choice for investors. Furthermore, some AFMs erroneously cite barriers to reducing fees, which may hinder efforts to improve value for investors.

Tensions between Profitability and Value for Investors:

One of the key challenges highlighted in the review is the tension between a fund’s profitability for an AFM and assessing its value for money for investors. This tension can influence decision-making and outcomes in the AoV process. It is crucial for AFMs to strike a balance between profitability and value, prioritizing the interests of investors.

Good and Poor Practice Guidance:

To assist AFMs in improving their AoV processes, the FCA provides guidance on good and poor practices for six of the seven considerations in the AoV process. This guidance serves as a valuable resource for AFMs to ensure compliance with the relevant rules and implement appropriate changes.

Taking Action and Ensuring Compliance:

The FCA expects AFMs to carefully consider the findings of the review and take appropriate action. It is essential for AFMs to prioritize the interests of investors and ensure the provision of value for money. This may require making further changes to fee structures, enhancing transparency, and fostering healthy competition within the industry.

Conclusion:

The FCA’s multi-firm review on the assessment of value processes used by AFMs highlights both improvements and areas of concern. While many AFMs have made strides in integrating AoV considerations into their practices, there are still challenges that need to be addressed. The review emphasizes the importance of regulatory compliance and the need for AFMs to implement changes based on the findings. By focusing on the interests of investors and striving for transparency, accountability, and fairness, AFMs can create a more robust and value-driven financial ecosystem. It is crucial for the industry as a whole to work towards providing better outcomes for investors and promoting a culture of trust and integrity.

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