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FCA to require fund firms to justify benchmarks

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FCA to require fund firms to justify benchmarks

The Financial Conduct Authority (FCA) has introduced rules around the use of benchmarks when presenting fund performance, in the second set of remedies published following its asset management market study. 

The new rules require fund managers to explain why they use certain benchmarks and to reference them consistently throughout the fund’s literature once one is selected.

The regulator said: 'We have found that fund managers rarely explain why or how they are using particular benchmarks. Some of the ways fund managers use benchmarks include as a constraint on how they construct a fund’s portfolio, as a target for fund’s performance, or as a way for investors to compare the fund’s performance.'

When there is not a benchmark that corresponds with the way a fund is run, the regulator stated that fund managers must still be able to explain how to assess its performance.

It said: ‘We do not agree that where a fund has no benchmark, it should be up to the investor to assess a fund’s performance. As set out in CP18/9, we want investors to get improved information to explain what a fund does, how it does it and how to evaluate how well it is doing.'

Responding to criticism that the new rules around benchmarks would increase costs for asset managers, the FCA stated that it is not making it mandatory to have a benchmark, therefore it does not automatically guarantee higher costs. 

'Our rules do not place a new requirement on fund managers to use a benchmark. Therefore, our rules should add no direct additional cost where funds do not use a benchmark,' it said. 

In addition to justifying a fund's benchmark, asset managers will also need to follow the regulator’s guidelines to describe fund objectives and investment policies in order to make them more useful to investors.

Elsewhere, the regulator stated that performance fees should be calculated after all other charges have been deducted. Previously, the FCA only had guidance around this.

Christopher Woolard (pictured), the FCA’s executive director of strategy and competition, said: 'We’re working to make competition work better in the asset management market and protect those least able to actively engage with their investments. Today’s remedies build on those we’ve already introduced and will make it easier for investors to choose the best fund for them and help them achieve their investment objectives.'

The asset management market study was originally released in 2016, with the FCA saing it uncovered ‘a market failure in the economic sense’. The study criticised the performance of actively managed funds and questioned the charging structure used for them. In April last year, the City watchdog introduced new rules following the study. The announcement made today makes up the second set of rules following the study.

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