AMMS obligations on benchmarks now in force


Authorised funds managers are now obliged to follow the guidelines set out in the FCA’s Asset Management Market study when it comes to clarity of objectives and the use of benchmarks. Whereas the regulator’s thinking on clarity is relatively straightforward, the new definitions of benchmarks have caused some confusion. As of the 7th August, managers should have reviewed all communications with clients against the new requirements, so it’s crucial you understand what is expected of you.

New requirements following the Asset Management Market study

Earlier this year the FCA released a policy statement as a result of its Asset Management Market Study (AMMS). The guidance that followed covers two primary areas of concern: the lack of clarity in statements of fund objectives and investment policies, and in the use of benchmarks. The resulting obligations are now fully in place as of 7th August.

The requirements apply to managers of authorised funds (AFMs) subject to the Collective Investment Schemes (COLL) Handbook (such as managers of UCITS, NURSs and QIS).

Fund objectives and investment policies

The good news is that the FCA is confident its existing rules on fund objectives and disclosure are adequate and do not need adjustment. They have no plans to publish examples of good and bad practice, however they are publishing non-handbook guidance in order to give practical compliance assistance.

The FCA’s thinking on clarity is uncontroversial. They want to make it easier for investors to pick the most appropriate fund. The guidance in summary:

  • Managers should explain in consumer-friendly language what their funds are doing. (The Wisdom Council’s work on consumer understanding of commonly-used financial terms is helpful here – there are some surprising findings. Read more here: The Investment Association’s Fund Communication Guidance)
  • KIIDs and KIDs should be written without jargon and in a way that “facilitates understanding”, with the overall aims of the fund stated “clearly and in terms understandable to retail investors”.
  • “Relevant elements of the investment strategy” should be included in the description of objectives and investment policy.


To enable clearer investor understanding of the nature of funds, specific guidance has been given on how to refer to benchmarks. Three new benchmark categories have been created. (These are additional to those created within the EU Benchmarks Regulation and the proposed post-Brexit UK Benchmarks Regulation). These are:

  • A ‘constraining benchmark’ – an index or similar factor that fund managers use to limit or constrain how they construct a fund’s portfolio. The FCA has carefully considered the different ways in which a benchmark can create a constraint, and specifically mentions the following examples:
    • Where the risk management process for the fund causing it to be monitored and controlled relative to a benchmark.
    • Where those managing the fund are remunerated based on its performance relative to a benchmark.
    • Where the portfolio management system restricts transactions, using either hard or soft limits relative to a benchmark.
  • A ‘target benchmark’ – a benchmark or similar factor that is part of a target a fund manager has set for a fund’s performance to match or exceed, which includes anything used for performance fee calculation.
  • A ‘comparator benchmark’ – a benchmark or similar factor against which a fund manager invites investors to compare a fund’s performance.

Benchmarks confusion

The new definitions have caused confusion amongst users. The word “use” is itself a confusion, as it is a defined term under BMR, and is used differently in the AMMS.

In particular, a question arises over whether, if you mention a benchmark as a reference for the performance of a group of assets, is that a comparator? For example, it is common to make a statement such as “our performance has been good due to our exposure to UK midcaps, which as measured by the FTSE 250 have risen X% over the period.” There is split opinion regarding whether the FTSE 250 is, in this context, a comparator.

Our view on this – and we should be clear that there is no clear regulatory answer at this point – is that there is a significant difference between the use of benchmarks used to invite performance comparisons and indices simply used to help explain performance. The use of the word “compare” in the FCA definition of a comparator benchmark is to us important: “explaining” performance is not “comparing”. The latter is essentially looking to say something akin to “we’ve outperformed this measure”, the former is used to explain how that outperformance was achieved.

What you need to do

The FCA requires the managers of authorised funds to assess how they use benchmarks, using the above definitions. This includes where use of a benchmark is only implied and not explicitly stated.

Based on the results of that assessment:

  • Managers should explain why they use particular benchmarks or, if they do not use benchmarks, to explain how investors should assess the performance of the fund.
  • If a fund manager uses benchmarks, the benchmarks must be referenced consistently across the fund’s documents.
  • Whenever the fund manager presents the fund’s past performance, it must do so against each benchmark used as a constraint on portfolio construction or as a performance target.

Managers will then need to ensure they review and amend each relevant prospectus and all relevant marketing material in order to comply with the requirements now in force within the Conduct of Business sourcebook (COBS) 4.5 and the Collective Investment Schemes sourcebook (COLL) 4.2. Firms should take a holistic approach to ensure communications with clients (including relevant financial promotions) are consistent with the prospectus and the new requirements.

How Bovill can help

It is clear that the FCA wants managers to think very carefully about how benchmarks interact with the management of their funds. Many managers will not have considered the implicit use, and benchmark-related constraints that they operate under, or feel confident in assigning their use of benchmarks to the appropriate categories, given the constraints on usage that doing so may then create. The obligations to report and explain that are detailed above will cause many to change the ways they use benchmarks, and communicate regarding benchmarks.

Bovill’s markets team contains acknowledged experts in the creation, use and governance of benchmarks and benchmark-related products. We can help you identify and categorise your use of benchmarks, ensure you are compliant, and identify the best approach going forward under the new obligations and guidance. Whether you’re a bank, an insurer or an asset manager, we can help – from managing the whole project to supplying additional technical expertise to complement your own or to speed things up. Our extensive experience of benchmarks means we can streamline the process and make sure nothing is overlooked.