Like the links in an apparently never-ending chain, the FCA’s Asset Management Market Study has now produced a Policy Statement (PS 18/8) (PS18/8: Implementing asset management market study remedies and changes to our Handbook – feedback to CP17/18 and final rules | FCA) and, to maintain the flow, a further Consultation Paper (CP 18/9) (CP18/9: Second consultation on remedies following the asset management market study | FCA). With each link, we learn a little more of the Regulator’s intentions. We also see how very narrowly focused its output has become, despite the enormous breadth of the original asset management scope.

The Policy Statement might best be described as a document devoid of surprise. Where we forecast that FCA would stick rigidly to its plans for Independent Directors, it has done just that. Where we forecast that we might see some re-focusing of the definition of value for money, there we find some reshaping of approach. Where it was clear that they were determined to do away with riskless box profits, so it is to be. But where we thought they would have to act to curtail trail commission, they have dared not go.

What drives the Regulator in its crusade is its concern that investors are poor judges of their own best interest. While many will accept that basic proposition, not all will accept that FCA’s solution is the best. As we are told, not just in passing, not just once or twice, FCA takes the view that a fund manager is not ‘just’ a product provider, but also the agent of every investor that becomes a unitholder. This contention leads them forward to their preferred remedies that they have been floating for the past year, with a little more detail with each step forward. While the ‘agent’ assertion cannot be dismissed out of hand, some would argue that, but a few short years ago, widespread intermediation provided a market structure with an IFA as agent, responsible for the selection of products from a wide range of providers.  That separation of roles, while flawed in many specifics with enormous commission-related conflicts of interest, had its merits. But having RDR’d that model out, the Regulator must now make its silk purse from what is left of the ear.

And so, while all but ignoring the very existence and significant potential of the depositaries, FCA has set to work on the AFMs. A brace of Independent Directors – they make clear that they would like to see a cock and a hen – will carry the burden of ensuring, from within the product provider, now aka ‘agent’, that unitholders’ best interests are taken properly into account with every decision affecting the funds’ management. Key to this is to be the Assessment of Value.

Accepting that its consultation proposal for the assessment was too narrowly focused on cost, FCA has broadened its outlook to cover more effectively the quality of the service and performance provided. Or, at least, so it says.  Whether its not-very-radical redraft really changes very much is open to question. We do not know how much private consultation was undertaken before the revisions were published, but our forecast is that this is an area where enhancement will follow in the light of experience over forthcoming years.

A key decision that AFMs will need to make is whether they should outsource this Assessment of Value. FCA gives no hint of whether such a move is one that they would expect or welcome, but it may prove fundamental to the credibility of the process. A hapless junior manager, directed by the Board to prepare the assessment may struggle to articulate with sufficient frankness his views of decisions about an appropriate level of charge, made by the self-same Board in years past, some time before the possibly-disappointing performance emerged as a feature of the fund. Will it be that the greatest contribution of the Independent Directors is to insist on selecting the external supplier of said assessment?

And how good it is to see that, having recognised in CP 17/18 that “recruiting approximately 2-3 Independent Directors per AFM will create a challenge across the industry”, FCA is now (PS 18/8) of the view that they “don’t think that AFMs will struggle to find suitable Independent Directors”. As they explain, this is now not because the directors would need to be able to demonstrate that they understood the FCA’s logic that it was  possible to act both in the interests of the company’s shareholders and (also) “solely” in the interests of unitholders, but that the challenge will be simply wafted away by the introduction of “greater diversity across a range of dimensions: gender, ethnicity, socio-economic background, LGBTI+, age and disability”. So, that’s a relief.