What to expect from the FCA's mps review

We explore what the FCA might focus on in their review of Managed Portfolio Service (MPS) Provider

FCA MPS Consumer Duty review: potential focus areas

The upcoming MPS review: suggested focus areas for the regulator

By Henry Cobbe, Head of Research at Elston Consulting

The Financial Conduct Authority (FCA) is preparing to conduct a review of Managed Portfolio Services (MPS). While the project is still in the data-gathering phase, we set out here what we think the regulator would do well to focus on.
From our experience consulting to MPS providers since 2016 and seeing industry trends evolve over time, we see four key areas that merit focus: standardisation, the use of in-house funds, co-manufacturing and anti-greenwashing.
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As the MPS universe grows in adoption, number of providers and complexity, each of these focus areas would benefit from greater regulatory clarity.

Disclosure standardisation

​Whilst Multi-Asset Funds (MAFs) and Multi-Asset Managed Portfolio Services (MPS) differ in delivery, legal format, and tax treatment, they are similar in scope, use case and function.   Because Multi-Asset Funds are OEICs, they have a high level of standardised product disclosure.  They require a KIID, a factsheet, a benchmark and standardised performance reporting.

By contrast, whilst there is provider-led industry best practice as to what MPS disclosure should entail, there is no standardisation or indeed specific requirements.  There is no mandatory disclosure regime, no standardised factsheets are required, and there is no consistent way of reporting performance. Each provider does things slightly differently, which makes comparison difficult and therefore hampers transparency. In our view, this is a fundamental issue.

As the level of assets grows in MPS, it becomes all the more important that there is a transparent and level playing field as regards disclosure, which should be more akin to the funds regime.  That means clearly defined objectives, benchmarks, standardised risk metrics, and full fee disclosure. In our view, the industry should voluntarily adopt a “funds-like” framework for MPS in advance of and to assist regulatory review of this topic.
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There is a range of reputable third-party whole of market MPS comparison tool – such as FE MPS Directory and Morningstar Managed Portfolio Tool.  This helps enable MPS performance comparison on a like for like basis. However, such tools are only as good as the quality of the data vendors and their source material.  Where some less well known tools don’t have authorised access to manager data (model weightings files), we wonder where do they get their data from, how reliable is the data they show and do they have the relevant licences in place.

Use of in-house funds

MPS providers have varying policies on the use of inhouse funds.  Some MPS models are built with none, others with a mix (often deploying so-called “overlay” funds), and other using almost 100% in house funds.  For fund houses rushing into the MPS space, building out models with predominantly their own funds is in a way the whole point.  There is nothing inherently “good” or “bad” about using inhouse funds: they are different ways of implementing a model, but again disclosure and value for money is key.

Inhouse overlay funds can be a useful way for providers to solve platform access issues to reach certain instruments that many platforms cannot reach.  Many platforms find it harder to trade direct equities or exchange traded products on a fractional basis, for example.  Overlay funds are more flexible as it’s easier to make asset allocations within a fund than it is for models across multiple platforms.  Funds also benefit from CGT roll up within the fund.
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So again, careful consideration of value for money, conflicts policy and the consumer duty already exists in regulation, but to ensure confidence in the sector, some clear pointers to good and bad practices would be helpful.
Disclosure is everything. Clients need to understand what they’re paying for and why.

Co-manufacturing

Co-manufacturing is another area that we think the FCA would do well to focus on. We see it as a practice that could use some demystification. There is nothing inherently wrong with co-manufacturing: it simply involves an adviser firm reaching a formal, documented agreement with a discretionary fund manager (DFM) outlining who does what in the design and delivery of a product or service.  As it stands the sole obligation on Manufacturers and Distributors where co-manufacturing take place is to have a written agreement in place.

We see co-manufacturing as a spectrum where there is none (using a ready-made solution), where there is co-branding, where there is white-labelling, and where there are custom mandates and then the degree materiality of input into the design and ongoing management of a solution is key.  In all cases, documentation, disclosure and conflicts management is key.
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Problems arise when a lack of clarity or documentation in these arrangements blur the lines of responsibility or, worse, involve revenue-sharing with adviser firms that compromise independence and goes against the letter and spirit of RDR, so we were surprised to see some MPS providers stating that Adviser-DFM fee sharing is ok.  It isn’t.  There is also a trend of MPS providers creating JVs with the Advisers, so both parties share in created value.  But we would urge advisers to be wary of entering into any commercial arrangement that compromises their independence, or the ability to replace the manager of their preferred MPS solution.  After all. Trustees of pension schemes would never allow themselves to be locked in to a particular asset manager, the same should be true for trusted advisers of client assets.  Advisers must retain the ability to fire their investment manager if they are not delivering.  So we caution advisers not to become “captive”.  Ironically, where we have seen advisers misguidedly enter into such arrangements, they have under-estimated the importance of their client relationships and have ironically short-changed themselves.  For vertically integrated providers, where companies in the same group are providing advice, investment management and platform services, this is not an issue as that is exactly the service that clients sign up for.

Anti-greenwashing

Finally, we anticipate some kind of focus on greenwashing. With the proliferation of products and services bearing various ESG, ethical and sustainability-related labels, there is a need for clarity.  We think any greenwashing is more accidental than deliberate in the MPS world owing to an absence of clear guidelines.  That clarity has however been created in the funds world, but not in the MPS world.  As a result, a glance at Ethical labelled MPS models shows a surprisingly low content of SDR compliant funds.   Many MPS portfolios are branded as ESG or impact-focused but there’s no standard to verify those claims. Without an agreed regulatory framework, it is impossible to know whether these portfolios genuinely align with sustainable investing principles. Extending SDR to MPS and would oblige providers to back up their claims with evidence.  Earlier consultations (since postponed to the MPS Review) looked at a minimum threshold of SDR funds of say 70% to 90% for a MPS model to be labelled as “Sustainable.”  This was a challenge a few years ago in the absence of many SDR funds for different asset classes, but is now entirely achievable, in our view.  So those standards and a final minimum threshold needs to be set by the regulator to cut through the fog of terminology and reduce the risk of greenwashing – accidental or otherwise.

Summary

The central theme of our suggested focus areas in all the above is really the need for industry-wide standardisation that champions evolving best practice. Whether it is performance reporting, fee disclosure or Sustainability labelling, the MPS market has a growing need for consistency.

While awaiting the outcome of the FCA review, we are already working with our DFM and Adviser clients – including Advisers looking to create their own DFM solutions – to help pre-empt the review by rolling out a best practice approach to MPS.  It’s about future-proofing and mitigating business risk: just because you don’t have to do it yet, it doesn’t mean you shouldn’t – but we do need industry wide standards to ensure a level playing field and consistency of information and communication to consumers.

The FCA’s MPS review is a timely opportunity to bring greater rigour, transparency, and accountability to a fast-growing area of the investment landscape. Our message to our DFM and Adviser clients is this: embrace best practice now, and you will be ready for whatever evolving regulatory requirements.