Clear expectations around ethical disclosures
We will publish refreshed guidance to help issuers consider how they present their products in disclosures and advertising and enable investors to understand ethical claims. As practices are continuing to develop in this area, we will work with industry to embed our guidance and improve practices through feedback and insights.
We will take action where we see disclosures or claims that are materially misleading, deceptive, or unsubstantiated and where we believe the settings and expectations for ethical disclosures are already clear and in line with well-established fair dealing or disclosure requirements
Why this is our focus
Our research shows that ethical investment opportunities are increasingly important for investors, but also that investors are not confident in interpreting disclosure about ethical claims and are heavily reliant on headline communications from investment managers.
We have seen cases of poor disclosure, including where ethical labels were used but there was no detail about what ethical strategy was applied, or about what steps the manager would take if investments no longer met prior ethical claims. There is a risk that confusing, unclear, and inconsistent disclosure and advertising for ethical investment leads to uninformed investor decision-making and damages trust and confidence in ethical products.
We have also seen some good practices, including where additional disclosures are made available and clearly signposted. There is an opportunity for industry to increase transparency and understanding of compliance expectations for ethical investing claims and to improve the clarity of information provided to investors.
Consumers and investors understand fees, incentives, and commissions
For Managed Investment Schemes (MIS), we will focus on ensuring fees, incentives and commissions are well understood through engagement with the sector.
For Discretionary Investment Management Service (DIMS) providers, as part of our monitoring activities we will be looking to see clear and consistent reporting to customers about fees, rebates, and commissions.
Why this is our focus
Clients need to receive appropriate information around the costs and nature of advice, so they can make informed decisions about the service and products they choose.
Our 2021 managed fund fees and value for money guidance recommended appropriate disclosures be made regarding what fee is charged, who it is paid to, and what investors receive in return. Our DIMS sector insights report showed that while good practices exist, disclosure of fees is inconsistent across providers.
In relation to DIMS providers, there is a particular risk of investor harm arising from inadequate conflicts of interest management practices, including turnover controls to manage overtrading in commission-based portfolios and inactivity in fee-based portfolios.
Effective protection of client assets
We will assess how Supervisors have responded to the findings of our 2019 thematic review of MIS custody arrangements, including whether they have reviewed any custodial functions that are delegated to MIS managers or administrators, and whether they are actively overseeing outsourced custodial arrangements.
Inadequate client asset protection can lead to investor loss and negatively impact confidence in the financial sector. We will be examining DIMS outsourcing, including asking firms how they provide appropriate client asset oversight of outsource arrangements. We will monitor the arrangements DIMS providers have in place to oversee the outsourcing of client money or property handling to a custodian. This will include reviewing the governance and supervision of the service as well as how custody reports are being provided to clients to ensure appropriate protections are in place. Where providers and/or advisers hold client funds themselves, we will assess how robust their own processes are in terms of separation, accounting for money and property, record-keeping and reporting to clients.
Why this is our focus
The rules around client money and property handling are complex. The DIMS and MIS sectors account for significant and growing funds under management. In 2024, we published guidance to help participants to understand their obligations when providing client money and property services.
We have seen instances where weaknesses in custody have contributed to fraud or business failure resulting in investor losses. We have observed risks around the independence of some custody arrangements, as well as inconsistent custodial processes, procedures and controls.
Ensuring consumers’ and investors’ interests are at the forefront of decision-making
MIS managers should have effective liquidity risk management (LRM) practices in place. We will engage with Supervisors to understand the findings of their LRM monitoring activities and where further clarity or insights from the FMA could support improvements.
Clear disclosure of related party transactions in financial statements is critical for investors, enabling them to consider the relationships the entity has, and what impact these might have. Our monitoring of financial statements, providers, and market practices will focus on the practices and controls relevant to related party transactions, particularly for registered schemes and DIMS.
Why this is our focus
In the past, we observed that some MIS managers were overly optimistic about their LRM capabilities, and even the relatively strong performers had gaps in particular areas, including frequency of stress testing, use of available liquidity management tools, and metrics. In 2024, we published a liquidity risk management guide to aid effective decision-making for MIS managers and Supervisors. We expect MIS managers to have considered the 2024 guidance, reviewed their LRM practices, and made improvements where appropriate.
Related party transactions present conflicts of interest for investment management firms and can result in decision-making that is not in the best interests of investors. We have seen instances where we believe controls have not been applied effectively. Our monitoring will allow us to assess whether this is a more significant risk across this sector.
