FIMC recently submitted a response to the Financial Conduct Authority (FCA)/ The Pensions Regulator (TPR) Consultation CP26/1** The Value for Money Framework: Response to consultation, further consultation and discussion paper. The submission can be found here: FIMC FCA TPR VFM 0326
Summary of our submission
As we said in our response to CP24/16, we are supportive of the basic idea of VFM assessments of charges and service quality. The FCA/TPR has clearly put much thought into developing a workable VFM framework.
But we are very concerned about the degree of emphasis placed by the FCA/TPR on investment performance, particularly past performance, in the proposed VFM framework. Superior investment performance may well end up offsetting higher costs and charges. However, that cannot be said to be down to predictable ex ante skills on the part of the investment manager, consultants, advisers, and other intermediaries. It is very important to recognise that investment based services are not like consumer products or motor cars where the past performance can be used to determine the likelihood of future performance.
By allowing past investment performance to be the core of a VFM assessment, the FCA/TPR risks misleading pension savers and distorting the market. We have made significant progress in driving down charges and costs in the UK pensions and investment industry including through the use of the workplace pension charge cap. The weakening of the workplace pension charge cap and now this VFM framework threatens to reverse this progress. The VFM framework with its emphasis on investment performance will just allow investment managers, consultants, advisers, and other intermediaries to divert attention from the importance of costs and charges and actively promote and sell high cost, complex investment strategies which actually offer little added value but introduce greater risk.
It also risks causing more pension assets to be invested in high cost, complex, opaque, poorly regulated and governed ‘alternative’ investment assets and vehicles with questionable past performance track records and future prospects. Overall, we think the proposed framework is likely to result in poorer quality and value outcomes for ordinary pension savers and investors and less efficient allocation of resources by financial markets.
Worryingly, the proposals on Backward Looking Metrics (BLMs) and Forward Looking Metrics (FLMs) in this consultation could lead to even worse outcomes than those proposed in CP24/16. Moreover, it is disconcerting that the FCA/TPR is intending to allow firms to select their own assumptions about future performance rather than mandate standardised assumptions to prevent the system being gamed.