Thursday March 15 2018
News Source: Fund Regulation
Focus: Closet Trackers
In March 2018, the FCA published its report which reviewed potential closet tracker funds and closet constrained funds. This investigation formed part of its ongoing supervision of UK authorised funds to deliver high levels of investor protection and maintain a competitive market environment.
The FCA has found, some funds make asset allocation decisions, typically setting out to beat a benchmark (active funds) while others strive to track a benchmark (passive funds), whilst others combine these features.
It has been found that many closet trackers and closet constrained funds charge fees similar to active funds. This is the case, even though, they are managed in a way that is similar to passive funds which traditionally charge a much lower fee.
Closet constrained funds make active decisions. However, their investment strategy is constrained to making restricted decisions around their respective benchmarks. Closet trackers are passive but look and charge like they are active.
Clearer communications to investors
Clear, fair and not misleading promotional material and investment objectives are a priority for FCA. You can find out more about these in FCA’s proposed remedies in the Asset Management Market Study final report and in the Policy Statement 19/4(Asset Management Market Study – further remedies), as well as about the Consumer Research which was conducted as part of the Asset Management Market Study.
These changes have a single aim, laid out in FCA’s Mission:
- to achieve a market that works well with firms competing on the value they deliver
- a market that is fair, transparent and open
- to ensure that investors, whether they are actively engaged or not, can better understand the investment products they are buying
- where we discover firms are failing to meet our expectations, we will take appropriate action
What firms should do
Fund managers are expected to communicate fund investment objectives and policies in a fair, clear and not misleading way. In this it is important that investors have clear information and the best possible understanding of the funds they are looking to invest in or are invested in. Improved disclosures regarding the use of benchmarks or on what the fund is looking to achieve, can help investors compare funds more easily. Guidance surrounding this is included in Policy Statement 19/4.
What FCA has done
FCA in its Meeting Investors’ Expectations thematic review in 2016, had found that while most funds invested in line with their stated strategy, some were not being clear with their investors. In particular, the funds it came across that were not being clear were closet tracker and closet constrained funds.
FCA had followed up on this work using quantitative and qualitative analysis. By the end of 2018 it had reviewed 96 funds. This included a mix of equity, fixed income and multi-asset funds that had the potential to be closet tracker or closet constrained funds. As part of its ongoing supervision of UK authorised funds, FCA continues to analyse these types of funds to ensure they are being managed appropriately and have adequate disclosures.
Summary of findings from quantitative and qualitative analysis
In summary, 25 of these funds were adequately describing how investors’ money was being managed. Of the remaining 71 funds, FCA are working together with firms on 39 of them. Many of these funds are likely to update their disclosures to investors in 2019 following the release of Policy Statement 19/4 and 32 funds have already made improvements. Often, these fund disclosure changes were not material and only required clarification. Overall, £34m in voluntary payments have been made to funds and investors. Separately two enforcement investigations are ongoing against firms.
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