The Financial Conduct Authority is probing compliance by fund management groups with new governance rules as it seeks to improve accountability in the sector following the Neil Woodford scandal.
The City watchdog is holding closed-door discussions with a cross-section of companies to check effective steps are being taken to root out funds that provide poor value for money, according to several people familiar with the matter.
New rules introduced last year require investment managers to carry out annual value assessments for each of their funds and take action on vehicles that are short-changing investors.
The Fund Boards Council, a group representing fund directors, said that of the 135 statements published so far, just 4 per cent made a clear effort to identify remedial action to improve their funds.
The framework was established by the FCA following its landmark asset management report, which uncovered weak price competition and high fees. However, it has taken on new urgency in the wake of the blow-up of Neil Woodford’s flagship fund last year, which dented trust in active managers.
Most fund managers only started issuing value statements this year, so the regulator’s early scrutiny will serve as a warning shot to managers. It suggests that the FCA is ready to take action, which could lead to fines or sanctions, if it finds that groups are not complying with the spirit of the rules.
People familiar with the talks said the probe was aimed at gathering information on good and bad practices before providing feedback to the market later in the year. When the rules were introduced, the FCA deliberately did not prescribe how managers should conduct the assessments and instead left it to the industry to do the right thing by investors.
However, several value assessments have attracted criticism. Hargreaves Lansdown’s report was blasted as a “whitewash” by investor campaigners for giving a clean bill of health to its multi-manager funds, despite their large exposure to the failed Woodford Equity Income fund.
“There are a number of managers who underestimated the thought they needed to put into this,” said Shiv Taneja, chief executive of the Fund Boards Council. “As a result, it has ended up being a rather halfhearted effort in many instances.”
One person familiar with the review said the FCA was probing the process and governance behind the value assessments rather than the statements themselves.
Independent directors, who managers now have to appoint to their fund boards, are being questioned on the strength of their oversight. The regulator wants to know whether these individuals “have proper teeth”, one person said.
Investment industry veteran Philip Warland, who serves as an adviser to the Fund Boards Council, said that establishing this culture was an “evolutionary not revolutionary” process. He added that peer pressure, combined with the FCA’s review, would help good practices to emerge.
The FCA declined to comment.