FCA review finds shortfalls in unit-linked fund value and governance

The FCA has been reviewing governance practices around unit-linked funds as part of its wider programmes of work on asset management and non-workplace pensions. A package of measures aimed at improving authorised fund value for money come into force later this year; however, these measures will not apply to unit-linked funds, which similarly account for around £1 trillion worth of assets.

The FCA is considering whether to introduce new rules in this area. However, it will not do so until it has completed a planned review of the effectiveness and scope of workplace pension scheme independent governance committees (IGCs). IGCs and other pension governance advisory arrangements (GAAs) have a limited remit over unit-linked fund performance, but only to the extent that these funds are used as investment vehicles for workplace pensions.

In its review, the FCA said that it had found "similarities" between governance practices for unit-linked funds and fund management.

"As we found for authorised fund managers of authorised funds, insurance firms' fund governance for unit-linked funds often does not include considerations that we believe are likely to be important in assessing whether unit-linked funds provide good value for their investors," the FCA said. "Specifically, we found limited consideration of unit holders' interests in decision-making around levels of fees and charges."

Most UK pension savers who are members of defined contribution (DC) pension schemes invest in financial markets via unit-linked funds. However, a typical investor will not necessarily be aware that they hold this type of investment, as they share many common features with investments in authorised funds.

The FCA said that the assessment of "value" by firms offering this type of product tended to be quite limited, based only on the level of fees and charges rather than how active the role played by the fund manager. Typically, firms do not compare the fees and charges of different funds within their unit-linked fund ranges, and were generally unable to provide reasons for significant disparities in fees and charges among otherwise similar funds when questioned by the FCA. They were also unable to show whether product features other than asset management were good value.

Firms had responded to regulatory initiatives, such as the default fund workplace pension fund fee cap and FCA guidance on the fair treatment of long-standing customers, according to the FCA. However, they had not typically gone any further. An example given by the FCA was firms not considering whether they should use the same rates for other, similarly-managed funds in their range in order to provide better value to all their customers.

While the introduction of IGCs and GAAs had generally had a positive impact, governance bodies were typically not challenging fees beyond the relevant charge caps even where firms appeared to benefit from substantial economies of scale and other efficiency gains. Governance bodies also told the FCA that their annual reports were not always given sufficient prominence on firms' websites and in investor communications.