The Financial Conduct Authority (“FCA”) issued in April 2016 a thematic review entitled “Meeting Investors’ Expectations” (the “TR”). The review considers whether UK authorised funds and segregated mandates are operated in line with investors’ expectations as set by firms’ marketing materials, disclosure materials and investment mandates. The FCA’s findings are based on a sample of 19 UK fund managers responsible for 23 UK authorised funds and 4 segregated mandates and relate to clarity of product descriptions, providing adequate oversight and governance and ensuring appropriate distribution.

The TR sets out a number of key messages which in summary comprise the following:

1. Fund managers must ensure that product descriptions are clear and correct given they are relied upon by investors and financial advisors;
2. Fund managers must provide effective governance and oversight throughout the whole a fund’s life, including closed books;
3. Fund managers need to identify trends that may indicate inappropriate sales by monitoring their distribution channels; and
4. Distributors must ensure that they obtain the correct documents from fund managers so appropriate information can be provided to investors.

Clarity of product descriptions

The FCA considered firms generally provided adequate information about the funds’ strategies, characteristics and inherent risks. Common themes of what the FCA considered good practice included:

1. Clear performance targets, investment criteria and spread of investments across different asset types;
2. involvement in the product preparation process of fund managers or personnel with an in-depth understanding of products, including drafting product descriptions and reviewing marketing literature for accuracy;
3. signposting complexity by recommending investors seek financial advice;
4. clear explanations of risks to investors which are consistently communicated to investors; and
5. end-customer testing to assess retail investors’ understanding of documents.

Some examples of poor practice were also cited, including unclear product descriptions and unclear or misleading descriptions in the KIID of how funds were managed.

One specific point the FCA picked upon was funds employing index strategies with limited flexibility to invest differently from that index (so-called “closet trackers) or having material passive holdings without adequately disclosing this in customer-facing documentation.

Providing adequate oversight and governance

The FCA specifically addresses two aspects of oversight and governance. Regarding portfolio monitoring, the FCA was generally satisfied with firms’ procedures in respect of portfolio monitoring, and highlighted one example of good practice where one firm compared various aspects of a fund’s management against investor communications. This made sure the fund was managed in line with how it had been presented to investors.

Regarding funds which are not actively marketed, the FCA has stated that firms must monitor funds and treat customers fairly throughout the lifetime of a product irrespective of whether it is being actively marketed.  The FCA noted that there appeared to be a concentration of regulatory issues with funds that were not actively marketed, suggesting firms had not overseen them as carefully as actively-marketed products. Firms should consider this in respect of their legacy and “closed book” products.[1]

• [1] Fair treatment of closed book/product customers is a recurring theme for the FCA at present, e.g. TR 16/2, “Fair treatment of long standing customers in the life insurance sector”.

Ensuring appropriate distribution

The FCA highlighted the importance of firms controlling their distribution channels to ensure that products are marketed only to those investors to whom they were intended to be marketed. One example was products which were only intended to be entered into on an advised basis. The FCA found several examples of these products being made available on execution-only platforms, without the product provider’s knowledge. This gave rise to a risk that investors had invested without first obtaining proper advice.

The FCA also expects firms to monitor sales data to identify unusual patterns that may indicate a problem in distribution leading to inappropriate sales, and to consider how to get sufficient data from distributors to allow them to ensure appropriate product distribution. Specific examples of good practice included using indicators such as levels of cancellations to monitor distribution, and conducting due diligence over financial advisers and training them in the features of the firm’s products.

Firms should also ensure that product documentation is provided only to those persons for who is intended. The FCA used the example of fund factsheets for financial advisers, noting that it should be made sufficiently clear where such documents are intended for use by financial advisers and not by retail investors. Statements regarding the intended audience for such documentation must be sufficiently prominent, with the FCA noting that a small disclaimer in a paragraph of small print at the end of a document is not prominent enough.

Next steps

Fund managers should consider the content of the TR in the context of their product design, governance and marketing procedures, in relation to both existing and any proposed funds. Distributors should also take note of the FCA’s views on their responsibilities and ensure that their arrangements with fund managers facilitate their compliance with those responsibilities.