Fund managers must ensure that the products they offer do what they say they will, even if that product is no longer actively marketed to new customers, the Financial Conduct Authority (FCA) has warned.
The City watchdog said that it had found "examples of unclear product descriptions and inadequate governance or oversight" during a review of 23 products managed by 19 UK fund management firms. In particular, firms were not being clear enough about whether some products were actively managed or merely followed a benchmark, while others were not properly monitoring how their products were sold through third parties.
Financial regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law.com, said that while the FCA's findings were "generally positive", the need for "joined-up, focussed thinking" by fund managers across the lifespan of a product was "clear".
"It is not good enough to have a standardised, one size fits all approach," she said. "Instead the fund manager, compliance, legal and marketing and communications resources need to work closely together to ensure that the fund documentation - from prospectus to KIID [key investor information document] - plus all marketing documents are tailored to the specific fund."
"The document pack must accurately detail strategy, risks and distribution, and be presented and written in language appropriate to the nature of the document and the intended recipient. So the FCA takes a dim view of firms using 'jargon' retail customers may not understand, and of 'closet trackers' where a fund passively tracks an index without disclosing this to investors. The FCA expects clear, full disclosure consistent across the entire customer-facing document pack, and firms must remember that documents may be available to customers from a range of different sources when they check they are all on-message," she said.
The FCA was reviewing whether UK authorised investment funds and segregated mandates were meeting investors' expectations as part of a wider programme of work targeting regulatory compliance within the asset management industry. The work was based on whether marketing and disclosure materials and investment mandates met FCA rules and not whether the fund itself performed as expected, and also covered how the relevant firms monitored the way in which their products were distributed and sold by third parties.
Good practice requires funds to thoroughly explain their investment strategy as well as specific information about aims of the fund and how its assets are allocated, while firms must also have sufficient oversight of their products to ensure that the fund is being managed in accordance with the stated investment policy. However, some funds were not providing a clear enough explanation of how they were managed to prospective customers, while the funds in the FCA sample that were no longer being marketed to consumers did not clearly disclose their investment strategies at all.
Among the examples of poor practices found by the FCA were seven examples of misleading marketing materials and unclear product descriptions, including five funds which were marketed as being actively managed but which actually used "a benchmark-related approach that should have been disclosed" to potential investors. It found that some firms were investing in innovative, data-led approaches for monitoring how and where their products were sold, but that two of the reviewed products had been made available to investors on execution-only platforms despite having been designed to be sold only with proper financial advice.
"Firms are generally managing funds as they say they will," said Megan Butler, the FCA's director of supervision for investment, wholesale and specialists. "In most circumstances they are clear about how they are going to invest and have the correct level of oversight to ensure practice follows promise."
"However, the industry needs to consider how it communicates when funds are linked to financial benchmarks. It is also vital that funds keep investment practices under review so they match their stated aims and strategy, irrespective of whether the fund is still actively marketed, because investors base their decisions on this information," she said.
The FCA is writing to all 19 firms involved in its review to provide individual feedback, and to ensure that the most significant issues raised by its report are addressed, it said. It expects to publish an interim report as part of its wider asset management market study in the summer, it said.
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