FMA releases Value for Money Industry Report

  • Legal update

    18 May 2022

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Today the Financial Markets Authority (FMA) released its Value for Money Industry Report (Industry Report). The Industry Report sets out the FMA’s and Supervisors’ key findings from the Value for Money implementation pilot, and follows the FMA’s Value for Money Guidance (Guidance) published last year.

Links to the FMA media release, Industry Report and Guidance are available here, here and here. See also our previous note on the Guidance.

Who needs to read it? Why?

This is relevant for managers and supervisors of managed investment schemes. Fund managers and their supervisors are expected to review the Value for Money of the funds offered by the fund manager at least annually, with the first review to be completed by mid-2023.

What does it cover?

The FMA has published its key findings from its pilot:

  • Performance: Performance data shows skill is present among some (not all) fund managers in the pilot study, with fund managers using both active and passive strategies performing competently relative to an appropriate market index and to logically chosen selections of comparable funds. However, the impact of fees caused the benefit of this competence to investors to disappear for most funds.
  • Market index: Some fund managers are not using an appropriate market index for their funds and/or their performance fee models – typically, through using a cash-based market index as a reference point for the performance of an equity-based fund – and there is wider fund manager scepticism about the value of a market index to determining value for money.
  • Embedded advice fees and trail commissions: Fund managers commonly pay substantial commission to third parties for introducing new members to their funds – only some of which are financial advisers helping investors make good investment decisions. This has a significant, ongoing impact on fund costs, the fees paid by investors and, ultimately, on fund performance, which is the most important aspect of value for money to investors.

The FMA considers that “providing value for money is not a peripheral aspect of acting in members’ best interests, it’s a core aspect of that responsibility”.

Our view

The pilot is part of FMA’s ongoing focus on good conduct and best customer outcomes.

We welcome FMA’s clarification that Value for Money is not designed to push the industry towards being passive and low fee. The key focus should be on whether active and passive funds are delivering the desired results (respectively, outperformance or close replication of market index performance after fees).

Despite that, at least some of the FMA’s findings may be regarded as controversial by managers and supervisors of managed investment schemes. Some will argue that the sub-set of the market which was included in the pilot may not necessarily be representative of the whole – the pilot involved a select number of MIS Managers and a total of 14 funds. Others may argue that where prudent but non-expert investors have made choices having received clear and concise disclosure as required by the applicable regulations, it should be assumed that those investors have good reason for making the choices that they have.

Whether or not they agree with the findings, the reality is that they do represent the FMA’s view and can be expected to inform its priorities in the future. Accordingly, all fund managers should be prompted to review their fund offerings and strategies, and consider whether they have a robust justification for the approach that they are taking to the relevant issues.

We note that some of the FMA’s findings raised issues which appear to go beyond the current regulatory requirements. In particular, the FMA notes that trail commission should be individually itemised instead of included within management fees. In our view, the FMA should engage with the Ministry of Business, Innovation and Employment to review and update the relevant regulations.

What next?

Some findings, and some matters raised by fund managers in their feedback, are symptomatic of broader issues in the industry. The FMA will be pursuing specific matters with individual fund managers and engaging with the industry on the market index and commission issues.

The FMA and the supervisors are also seeking feedback on the draft self-assessment tool used in the pilot to ensure consistency of process. All fund managers are invited to provide feedback on the self-assessment tool by 31 May 2022.

If you have any questions in relation to the Guidance or are considering how the Guidance and Industry Report may affect your business, please contact one of our experts.


This article was co-authored by Vivien Liu, a Senior Solicitor in our Banking and Finance team.