FSA pursues absolute return probe following sector overhaul

The Financial Services Authority (FSA) will continue to scrutinise the potential mis-selling of absolute return funds, in the wake of the Investment Management Association’s (IMA) sector overhaul.

Last October the watchdog said it had found evidence of poor controls, incorrect risk calculations and badly worded marketing material as part of thematic work from earlier in the year. At the time, it said it was consulting further on the issue, which could lead to changes in the collective investment schemes (COLL) rule book in its Quarterly Consultation Paper.

Last week, the IMA moved to provide more clarity, renaming the sector Targeted Absolute Return to make it clear returns are a target and not a guarantee.

IMA chief executive Daniel Godfrey said the move was not motivated by a desire to keep the FSA off the sector's back. 'This is something we've been working on for two years and separate to the FSA investigation,' he told Wealth Manager.   

‘We thought the sector needed to be reviewed. There were issues in the way it was being interpreted and the way it was being presented and we did not think investors could appreciate its diversity,’

While the FSA would not be drawn into commenting specifically on the IMA initiative, it said it was not about to close the book on the sector. ‘We are still continuing our work on the absolute returns sector, we are continuing to analyse the responses to our consultation,’ a spokesperson told Wealth Manager.

In other changes, the IMA also extended the timeframe over which absolute return funds target positive returns from the original 12 months up to three years, dependent on the fund.

The restructure has received broad support from the UK's biggest absolute return players, including BlackRock: 'The number of funds is increasing, giving investors more choice which I think is a good thing as long as people understand that the return is a target rather than a guarantee,' the firm's managing director and head of UK retail Tony Stenning told Wealth Manager.

Standard Life Investments, manager of the sector's biggest fund GARS, also welcomed the increased transparency. The firm's head of UK wholesale, Jacqueline Lowe, said: ‘The FSA became concerned because a lot of money was going into the sector and in some cases performance was off the mark and there was lack of clarity.

‘However, while I don’t believe any of these concerns are directed at us as we’ve done a huge amount of work educating people on how GARS works, we see the IMA’s move as a big step forward.’

Meanwhile Henderson head of product, James Bowers, added: 'The IMA has introduced some nuances to the sector that were needed and has set investors’ expectations more clearly, which is broadly a positive.'