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20 February 2017

Ms Becky Young Competition Division Financial Conduct Authority 25 The North Colonnade Canary Wharf London E14 5HS Submitted via email to: assetmanagementmarketstudy@fca.org.uk

RE: Asset Management Market Study-Interim Report Dear Ms Young, BlackRock Group. (BlackRock)[1] is pleased to have the opportunity to respond to the Interim report on the Asset Management Market Study issued by the FCA in November 2016. BlackRock supports a regulatory regime that increases transparency, protects investors, and facilitates responsible growth of capital markets while preserving consumer choice and assessing benefits versus implementation costs. We welcome the opportunity to comment on specific issues raised in the Interim Report and are generally supportive of the overall industry response provided by the Investment Association. BlackRock will continue to contribute to the thinking of the FCA on any issues that may assist in the final outcome of the review. In providing our response, we have focused mainly on the remedies proposed within the Interim report and any potential unintended consequences these may have.

Executive summary A number of the remedies proposed within the Interim Report are in place or are in the process of being finalised and/or implemented. For example, the following pieces of legislation already provide enhanced transparency and governance requirements, each with differing technical provisions:

Undertakings for Collective Investment in Transferable Securities Directive (UCITS IV);

Markets in Financial Instruments Directive (MiFID II);

Packaged Retail and Insurance-based Investment Products (PRIIPs), and;

Insurance Distribution Directive (IDD)

Senior Managers and Certification Regime (SMCR) These observations have not been fully reflected within the Interim Report and we believe there is an opportunity to push for harmonisation of standards and reporting rather than creating overlapping, duplicative or conflicting set of requirements and would suggest the FCA conduct a gap analysis between the remedies and forthcoming regulation before implementing further regulation. Firms, including BlackRock, have existing product governance standards which focus on ensuring that the investment product objectives, risks and pricing are clear and transparent to

[1] BlackRock is one of the world’s leading asset management firms. We manage assets on behalf of institutional and

individual clients worldwide, across equity, fixed income, liquidity, real estate, alternatives, and multi-asset strategies. Our client base includes pension plans, endowments, foundations, charities, official institutions, insurers and other financial institutions, as well as individuals around the world.

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the investor through the product documentation and literature and that products are managed in accordance with them and are “true to label”. We believe competition is about giving clients effective choice on product and services which suit their needs. It is therefore essential that managers ensure that their products remain true to label to support consumer choice. This concept affects both transparency and simplified reporting, and also applies to oversight. We welcome the FCA’s proposal to introduce clear and measurable expectations for fund managers about how they are acting in the best interests of investors. We live in a dynamic world. This means standards should not be static so FCA and industry need a plan to keep standards up to date as markets and consumer expectations evolve. We believe that the publication of best practice guidelines on an ongoing basis to provide a benchmark or guidance, rather than prescriptive rules, would be beneficial in this area.

Best interest and governance standards BlackRock supports initiatives that help deliver clearer and measurable standards for Authorised Fund Managers (AFMs) to demonstrate that they are acting in the best interest of unitholders. However, we recognise the importance of having a consistent market standard of what is meant by ‘acting in the best interest of the client’ so that firms have clarity on all issues they are expected to consider in performing their duties and clients know what they can expect from their agents. BlackRock believes that the ongoing publication of good and bad practices would help clarify expectations in this area without the need to introduce prescriptive rules, which may not fully take account of the unique and varied needs and expectations of clients or changing market dynamics. Provided that the market is working properly with multiple competitors, multiple buyer access points and transparent pricing/performance, then there should not be a need for direct regulatory interference in the price setting process.

Costs and value for money While the Interim Report considers many of the challenges in creating a more competitive industry, we believe that the assertion that cheaper products naturally provide greater value for end investors is an oversimplification. Rather, the focus should be on whether the product set chosen by investors or by their advisors is likely to deliver the investor’s desired outcome and how the costs incurred contribute to achieving this outcome. While BlackRock recognises that costs are a significant factor for clients in assessing the value for money they receive, the Interim Report should take full account of the wider individual needs and expectations of customers and the level of service and complexity of products made available by firms to address those needs. The Interim Report acknowledges that high levels of intermediation form a key feature of the asset management industry and we agree that there should be greater focus on the role of intermediaries, as well as the wider value chain, in fund selection.

All in fee and Cost disclosure standards BlackRock is generally supportive of using a fixed Ongoing Charge Figure (OCF) as an industry standard to product pricing and support the drive towards greater simplification and clarification of pricing. However, we do not agree that an all in fee will necessarily result in incentivising fund managers to control the charges taken from funds any more than the current variable OCF model and in fact could have some unintended negative consequences such as, encourage managers to be disingenuous with their estimations or suppress trading activities to reduce transactions in order to appear more competitive, which may not be in the interests of investors. We believe that transaction costs should be reported alongside, but remain separate, from the OCF given the variable nature of transaction costs which are incurred in order for AFM’s to meet the investment objectives of the fund. In addition we take the view that certain other variable costs and fees should also be reported separately, in particular performance fees and fees relating to securities lending activities as the additional context provided with disclosure will allow investors to evaluate costs relative to the benefits in order to asses value. For

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example, whilst there is a cost securities lending, it is additive to fund returns. Without this context, funds that engage in this activity may appear more expensive than similar funds that do not. Consistent with forthcoming European requirements in MiFID II (Markets in Financial Instruments Directive) and PRIIPs (Packaged Retail Investment and Insurance Products Regulation), we support disclosure in both percentages and on a ‘pounds and pence’ basis to ensure the greatest level of consumer understanding of the impact of costs to them. Furthermore, consideration should be given to different fee models within the fund market. For example it should be noted that ETFs typically employ an all in one fee structure already through the Total Expense Ratio (TER) where an ETF pays the fees, operating costs and expenses as a single flat fee. This excludes transaction costs. We also draw attention to the requirements in MiFID for intermediaries to give full disclosure of their costs to investors. This will allow product and intermediary costs to be presented together so that the investors can see the full cost of investing throughout the chain of intermediation.

The role of governance bodies We support efforts to strengthen the effectiveness of fund oversight committees to act in the best interest of investors and believe that a degree of independence on fund oversight committees may be beneficial. The application of the Senior Managers and Certification Regime (SMCR) means that all directors whether independent or not will be subject to a far more stringent regime. Rather than importing an entirely new governance regime, such as a requirement for completely independent boards, we recommend the FCA take into account recent developments in other European fund domiciles with similar regulatory oversight regimes and duties such as in Luxembourg and Ireland (as well good practices observed in Germany and Switzerland amongst others) to ensure consistent and high level standards of governance. We note that the requirement for independent boards which applies to US Investment companies was developed in the context of different regulatory oversight requirements. However, there is no evidence to suggest that complete independence or one particular governance model improves value for money to investors. Imposing such requirements on funds offered or sold into the UK will increase costs, raise barriers to entry which could ultimately reduce competition In our view, existing standards such as the regulatory guidance provided by the FCA on the responsibilities of product manufacturer and distributor coupled with the overarching responsibility on firms to treat clients fairly provides a high benchmark for governance. This could be enhanced with further best practice guidelines on delivering value for money. In addition, the incoming MiFID II proposals look to further strengthen product governance requirements such as the new target market requirements designed to ensure products meet the needs of end clients including costs and charges do not exceed the expected advantages of the financial instrument. It is our view that any decision to further codify or introduce new governance requirements should be supported by a detailed gap analysis against the expected regulatory landscape once new European legislation is fully in place in January 2018. Any decision to introduce new governance measures without completing such an exercise could be both disproportionate and place the UK at a competitive disadvantage.

Performance Standards BlackRock does not believe that it should be the role of a regulator to shine a light on poorly performing funds as the term underperformance can be subjective. This is a complex area which could lead to investors taking action at an inappropriate time, which would not be in their interests. For example, investors may sell a fund when market conditions are unfavourable for that strategy and it is not therefore in their interests to do so, leading to increased transaction costs as well a potentially a run on the fund which may in turn affect the liquidity within the fund. We believe that the development of standardised cost disclosure requirements will facilitate the development of commercial fund comparison providers and that the FCA should only intervene

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if there is a market failure to provide consumers with adequate information on the comparative performance of funds.

Disclosure Standards BlackRock is supportive of increased transparency to provide retail investors with sufficient information in order to make informed decisions without the need for excessive product related information. However, a siloed approach to improved cost transparency means there are currently four Regulations and Directives at EU level seeking to implement new requirements for cost disclosure. These are Undertakings for Collective Investment in Transferable Securities Directive (UCITS IV), MiFID II, (PRIIPs and the Insurance Distribution Directive (IDD) with each containing differing technical provisions and requiring implementation over different timescales. A standardised disclosure of fees and charges would ensure greater consistency for each of these proposals. We welcome the Investment Association’s work in the area to develop an industry wide disclosure code which is intended to meet a number of regulatory standards for transaction cost disclosure, returns, fees and research payment accounts.

Share classes The Retail Distribution Review (RDR) brought about some significant changes to the supply chain and whilst asset managers have created cheaper (unbundled) share classes for newer investors and notified existing investors the availability of cheaper alternatives in order for them to act, much is still dependant on investors switching out of the old share classes into the newer ones. In order for investors to switch to another share class, an explicit investor instruction is required. We believe, a proportionate and effective way of moving investors affected by this scenario could include annual mailings to investors where a direct contractual relationship exists, informing them of the options that may be available to them. We would welcome further consideration by the FCA on how managers can move investors into better value share classes using their existing powers, subject to appropriate disclosure.

Institutional issues BlackRock is supportive of increased transparency on costs and believe that a standardised disclosure of fees and charges would result in material benefits to investors whether institutional or retail. As noted above, we recognise and support the work by industry bodies which is intended to meet a number of regulatory standards for transactions costs disclosure, returns, fees and research payment accounts. We note a number of ways that the industry can pool assets. In addition, there is significant evidence to suggest that improved governance leads to better decision making and results in improved standards. However, further consideration of all of the options between merging whole schemes, commingling assets or governance pooling, should be explored more fully.

Investment consultants Consultants play a critical role in the institutional market, one that is mandated by UK pension regulations, in order to assist Trustees in pursuing the full funding of their schemes and the ability to pay retirement benefits to their members. It is therefore important that any advice provided to them in determining the success or failure of a pension scheme objectives is appropriately monitored and reviewed to ensure consistent regulatory standards are set.

International Competitiveness While BlackRock is supportive of this regulatory initiative, we also stress the importance and significance of the findings in the context of the wider decision of the UK to leave the European Union. BlackRock recognises the important role that the UK has played in helping shape the asset management industry in Europe and while wishing to ensure that the UK industry is held to the highest standards it must remain competitive within the European framework after the

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UK’s exit from the EU. In particular, the industry is working to implement comprehensive new European cost disclosure standards which we believe will largely address concerns regarding gaps in the current disclosure regime identified in the Interim Report. The FCA must remain attentive to any unintended consequences on the competitiveness of the UK following the implementation of the proposals set out in the Interim Report. We welcome further discussion on any of the points that we have raised. Yours sincerely,

Business signatory Patrick Olson Patrick.olson@blackrock.com

Legal and Compliance signatory Nick Gibson nicholas.gibson@blackrock.com Government Relations and Public Policy Signatory Martin Parkes martin.parkes@blackrock.com

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Responses to questions A strengthened duty on asset managers to act in the best interests of investors What is the likely effectiveness and proportionality of: The FCA setting out its expectations about how AFMs should demonstrate that they are acting in the best interests of unitholders BlackRock welcomes the FCA’s proposal of introducing clear and measurable expectations for AFMs to demonstrate they are acting in the best interests of unitholders as this will ensure that a harmonised and consistent approach is taken across the industry. A number of the remedies proposed within the Interim Report are in place or are in the process of being finalised and/or implemented such as UCITS IV, MiFID II, PRIIPs, IDD and SMCR. These observations have not been fully reflected within the Interim Report and we believe there is an opportunity to push for harmonization of standards and reporting rather than creating overlapping, duplicative or conflicting set of requirements and would suggest the FCA conduct a gap analysis between the remedies and forthcoming regulation before determining whether additional measures are required to ensure the alignment of interests between asset managers and unitholders. Furthermore, the effectiveness of any industry standardisation is largely dependent on the relevant industry participants agreeing to clear and measurable definitions. BlackRock therefore recommends given best interest requirements in legislation such as MiFID II 1 that the industry is more thoroughly consulted on the definition of ‘acting in the best interests of unit holders’, to remove any ambiguity as to the cumulative effect of existing and forthcoming legislative and regulatory requirements. The Interim Report focuses on costs being the primary driver of value for money rather than taking into broader investor considerations as well as those considered by the asset management industry. The Interim Report acknowledges that high levels of intermediation form a key feature of the asset management industry. Costs are indeed important to investors but due to the importance of intermediaries in driving end investor decisions we note that AFMs will often not know the overall wealth or portfolio positioning of an end investor and therefore cannot assume that every investor has the same interests or desires the same outcome. Equally, even in markets that are not intermediated, as in the case for Exchange Traded Funds (ETF’s), there is limited ability to look through to end investors with any degree of accuracy. Cost cannot therefore be the sole driver when an end investor determines whether they have received value for money. The quality of service they receive from an intermediary, the benefits of portfolio diversification across different asset styles and assets and the ability to meet an investor’s savings outcome all contribute to the value for money perceived by an investor, Investors will have different expectations around time horizons to achieve their objectives, appetite for risk, tolerance for short term volatility, desirability for brand association, security of assets, pricing and service. The range of costs reflect the different asset classes (e.g. equity, fixed income, multi-asset), different investment styles and different services provided. They may also have a basic alignment with the products investment strategy which drives whether the product is the right one for them which not be driven by costs alone. To demonstrate the different perspectives of investors, BlackRock notes that index investors consider a range of factors when assessing a product or service such as brand, breadth of range (important to enable switching between products with the same provider), liquidity in the case of ETFs, total cost of ownership including revenues generated by securities lending and whether the index fund is physical or synthetic, and price. The ability to manage a product against a defined tracking error to deliver a specific outcome is also an important factor. In

1 See Articles 24 and 25 of MiFID II and the implementing Delegated Acts

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contrast, multi asset investors will often attach greater importance to the breadth of the asset manager’s capabilities across a broad range of different asset classes. This is not an indication that a multi asset investor is indifferent to price, but rather that they would be likely to weigh the breadth of capability as being comparatively more important to them as they value the asset allocation service. Equally, one investor within a fund may utilise their holding as a diversifier to other investments within a wider portfolio that they hold or to hedge another exposure, whereas for another investor a fund may be a core component of their savings plans. Therefore, the primary focus of the AFM is not necessarily risk adjusted investment return but ensuring the products manufactured and made available to investors are ‘true to label’ and managed in a way that the investor could reasonably expect given the investment objectives and policies as reflected in the relevant documentation such as Prospectuses and KIID’s as well as marketing documents (e.g. factsheet). As a result, we believe that investors place a primary focus on the performance of a product or service against their expected outcome or investment objectives as well as on the costs of the service provided to them. In setting out expectations, the FCA should consider accommodating the fact that AFM’s can approach and demonstrate their commitment to act in the best interests of unitholders in different ways. For example, BlackRock does oversees its retail funds through a Retail Investment Oversight (“RIO”) function which is mandated by the various fund boards to undertake a fiduciary and governance role for the benefit of all unit-holders to ensure robust product governance standards are maintained. For the range of ETF products managed by BlackRock, the iShares Range Management function (“Range Management”) monitors product quality across the iShares ETF range and works closely with the investment management teams, product development and risk management functions and seeks board approval of identified enhancements to ensure benchmarks and investment objectives remain appropriate for each ETF. Governance reforms to help ensure firms comply with their responsibility to act in the best interests of unitholders In our opinion, current governance arrangements already do much to consider the best interests of unit holders and whether they are receiving value for money. The issue is rather one of coming to a common industry standard of the criteria used to determine value for money. In the UK, as part of their overriding duty to treat customers fairly firms already adhere to a number of standards such as the regulatory guidance provided by the FCA in relation to the responsibilities of product manufacturer and distributors and are actively preparing for the forthcoming regulations under MiFID II which will further strengthen product governance requirements designed to ensure that products are launched with an end target market in mind, that performance is reviewed and that products are in fact being distributed to that defined target market. This includes additional standards to ensure charging structures that do not compromise the objectives of the product as well as the provision on enhanced cost transparency on a pounds and pence basis through the intermediary chain to give the end investor clarity on the full cost of investing. Whilst technically MiFID II does not specifically apply to UCITS, AIFs and their respective management companies, the FCA is also consulting on the application of MiFID II product governance requirements to all product manufacturers in the sector to ensure that all asset management firms involved in the manufacture of products consider the needs of investors in product design, including the effect charges on investment outcomes. These observations have not been fully reflected within the Interim Report and therefore we would welcome a gap analysis from the FCA as to whether proposals for additional measures over and above current and future regulation are justified and proportionate. Firms, including BlackRock, have existing governing bodies which focus on ensuring: (1) that the investment product objectives, risks and pricing are clear and transparent to the investor through the product documentation and literature; (2) that the product is managed by the investment manager in line with the terms of the prospectus and other marketing documentation, and;

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(3) that investors interests are protected at all times when managing delegated and outsourced parties. BlackRock defines this process as ensuring the product remains “true to label” and, as noted above, is carried out by individuals independent of the day to day investment management process who are able to provide appropriate challenge as to whether end investor needs are being considered. BlackRock believes that provided product costs and performance levels are clear and transparent to all investors and that all investors have equal access to enter and exit funds at the current transacting NAV, then market forces will drive the appropriate pricing levels. The focus of investment product governing bodies therefore is best used on ensuring that the product is being managed on a true to label basis. Provided that the market is working properly with multiple competitors, multiple buyer access points and transparent pricing/performance, then there should not be a need for direct regulatory interference in the price setting process. When selecting an investment vehicle for their money, investors do not typically consider the existence or the activities of the governing body. This only becomes a feature when there is problem with the product. Therefore governing bodies, such as UCITS Management Company Boards (“Boards”) focus on the true to label concept as this is aligned to investor expectations. In the current environment, Boards would not be directly challenged by an investor if a competitor had a cheaper product, rather the investor will move his/her investment to a competitor and the result will be seen by the Board in terms of repeated outflows which will prompt a review as to whether the product still meets investors’ needs. Outflows are not necessarily a sign of investor dissatisfaction with the product itself but are often also the result of changes in investment allocation decisions, for example in the light of interest rate changes. Consequently an appropriate reaction by a Board to investor outflows may not be to cut fees but rather to ensure confirmation from portfolio and risk managers that a fund’s liquidity profile is appropriately positioned to meet changes in market sentiment to a specific asset class. Rather than focusing specifically on fees we recommend further analysis and guidance on what are the best practice measures in the round by boards and AFMs when assessing whether the fund is delivering value for money taking into account the full range of duties under the UCITS directive and the FCA’s own rules. Changes to the current scope of duties also need to be assessed in terms of legal liability and the costs to the fund of employing additional individuals to carry out these duties. Before concluding on any particular remedy, a wider consideration of EU fund governance requirements and best practices globally should be reviewed as, for example, Irish, Luxembourg, Swiss and German as well as UK domiciled funds may also be registered for sale in the UK and may have different governance structures from those experienced in UK OEIC’s and Unit Trusts. Furthermore, consideration should also be given to the legal structures of Authorised Unit Trusts and OEIC’s which may not lend themselves to one particular remedy proposed by the FCA. Imposing additional requirements on products sold into the UK may impact the competitiveness to provide a range of products to UK investors if they are required to comply with specific UK governance obligations that would not be a requirement elsewhere. The specific options (A-F) set out above As outlined above, it is vital that the fundamentals of any governance reforms are widely agreed by market participants. It is also key that any governance reforms set by the FCA do not reduce the ability for new participants to enter the market, impact participant’s ability to compete on a global scale or create unnecessary inhibitors to UK investors taking advantage and gaining value from relevant investment vehicles domiciled outside of the UK. For example many UK investors use money market funds and ETFs domiciled outside the UK. Overall BlackRock welcomes and supports further work on implementing improvements to existing governance arrangements through a variation of options A, B and C drawing on the experience of other European fund structures but however, believes options D, E and F are disproportionate to the benefits that would be provided to end investors. BlackRock sets out its rationale for these opinions as follows:

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A: Keep existing governance structure but clarify their duties: As the principles of treating customers fairly and managing to their reasonable expectations should be well engrained in all fund boards, the introduction of governance reforms could help ensure measureable standardisation across the market. BlackRock would welcome further consultation on the clarifications of duties and once agreed, a possible approach could be included into a board’s requirement for annual self-assessment. However, consideration should be given to how this regulatory obligation interacts with any similar legal duties Directors may have as officers of a company under the Companies Act and similar obligations including the requirements under the UK Listing Regime and the UK Corporate Governance Code as applicable to products such as ETFs. B – Strengthen the requirements on senior managers of the AFM: In addition to Option A, the introduction of strengthened duties applicable to board members could ensure greater standardisation across the industry however, the requirement to consider value for money would again need to be clearly defined and agreed by market participants and such a definition made clear to investors. For investors and any focus on governance reform, it is important to consider that value for money can be perceived in various ways and should not necessarily be conflated merely with price. It is also worth considering that investors may not always be simply seeking to achieve returns in excess of a benchmark from their investments, they may in fact be seeking to protect their money but also have the potential to grow over and above inflation and cash over time. They may also be seeking income, risk factors such as risk management or other outcomes. As noted previously, index investors consider a range of outcomes such as the ability to manage a product against a defined tracker error. BlackRock suggests that these considerations are taken into account by the FCA if strengthened duties on AFMs are progressed. In addition, BlackRock supports the introduction of extending the SMCR) accreditation to all board members with an appropriate transitional period and believes this would ensure that board members of all AFMs (large or small) were consistently and appropriately qualified and experienced. C- Change composition of existing governance bodies to create more independence: BlackRock would regard an AFM having non-executive directors as best practice to ensure independence. However, we believe that having a majority of independent non-executive directors and an independent chair would not be a proportionate or effective approach as it should not be assumed that the presence of independent directors by itself would lead to a better investor value for money outcome. The quality of the directors and a culture of challenge and professional scepticism within the board/organization are more impactful considerations. If implemented, this goes beyond the requirement even for public limited company boards and we feel a more appropriate approach would be for the FCA to consider a similar objective with the requirement to have an independent non-executive and a nominated ‘senior independent’ director or directors. BlackRock’s experience has shown that a mixture of independent directors and executive directors offers the best balance to the board and improves the quality of the oversight exercised and strength of debate in the meetings. An independent chairman or chairwoman can be advantageous insofar as there is a person, free from the shackles of a daily executive position, who can focus solely on the management of the board and its agenda. Additionally, the ability for smaller firms to attract suitable candidates may be a challenge or create excess expense, particularly if demand for such roles increases as a consequence to this option. Therefore it could have the perverse impact of reducing competition and new entrants. It is therefore essential that FCA puts in place a staged implementation process with clear milestones along the way for boards to meet in order to meet new standards to ensure successful implementation of any new regime. The individuals concerned may well have other significant responsibilities, given the ongoing impact of new regulation, and will require sufficient time to become acquainted with their new responsibilities and seek additional training and professional advice to be comfortable in their roles. As best practice constantly evolves we recommend the development of best practice guidance and standards by the FCA and industry bodies such as the Investment Association which can be readily updated over time.

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D – Create an additional governance body: A separate body modelled on the Independent Governance Committees for DC pension funds would potentially add significant extra complexity to the existing governance responsibilities. The DC pension requirements are very narrowly framed and apply to a specific group of clients and products. The underlying clients of an AFM (including UCITS, AIFs and NURS) and the product set can be very diverse. The measures of value are also varied and therefore a single unified body with overall accountability is preferable. An AFM board is in a position to see the full range of services that are provided to clients and therefore should be in a better position than any other body. It is also important to note that though the board is the ultimate fiduciary, it often sits within a larger governance framework, including BlackRock’s RIO or Range Management functions noted above, as well as others such as the product development committee. Products are brought to these other governance structures to ensure there is a good level of internal governance that has been applied prior to the boards being asked to exert their ultimate fiduciary duty. The introduction of an additional governance body may create additional barriers to the AFM’s ability to deliver speed to products to market which, would in turn stifle innovation in the industry and potentially impact investor’s ability to gain value for money from investment vehicles domiciled outside of the UK. E – Replace existing governance structures with a new body: As noted above, a number of considerations need to be made with the introduction of independent boards and it is unclear whether importing a governance model from one jurisdiction or another would achieve the desired outcome. In our view, setting out clear guidelines which leverage the expertise and benefits of existing governance structures in UK, US and as well as other European jurisdictions (e.g. Ireland and Luxembourg) would represent a more effective evolution of fund governance. Furthermore, any new Fund Board would still need to appoint an AFM or a Manager in particular to ensure all the AFM’s duties under the UCITS Directive, AIFMD and UK successor legislation have been met. We believe that is likely to be a duplicative process. BlackRock further notes that this arrangement is in practice today in the UK market with the existence of closed ended Investment Trusts who are required under the AITC code of governance to have majority independent boards. However, there is no consistent empirical evidence that Investment Trusts are better value for money than their open ended Unit Trust cousins. In relation to the FCA’s reference to the US Mutual funds, we make the following comments:

The US Mutual funds under the Investment Company Act of 1940 (“1940 Act US Mutual Funds”), operate within a very different regulatory, legal and commercial environment to UK products. The huge size and homogenous nature of the US market means there are a lot of investment products and investment managers competing for market share. These features make comparing the US model and experience with the UK market a challenging exercise e.g. the perceived lower pricing on US products may be driven by market conditions and scale rather than the obligation of 1940 Act Mutual Funds to annually re-affirm the investment manager’s fees.

For the 1940 Act US Mutual Funds, there is a requirement for an annual agreement on the fees paid to the advisor or investment manager. This process (in the form of Section 15c of the Investment Company Act of 1940) has become the major focus of many 1940 Act US Mutual Fund Boards. It is a very time intensive and an expensive process involving independently sourced information, fund by fund analysis and detailed discussions. There is no arguing that the US 1940 Act Mutual Fund Boards spend a considerable amount of time on the Managers fees than their UK equivalents. However the aggregate time that the respective boards spend on discharging their duties is broadly similar. Consequently we must conclude that US boards are spending less time on issues UK boards currently look at which include key areas such as an assessment of risk profile, performance and liquidity management and other areas of UK regulation where there is currently not equivalent in the US regulation such as the

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UK’s detailed rules on swing pricing designed to protect ongoing investors from the dilutive effect of individual large subscriptions on the value of their investments. This is not to judge one governance body superior to another but just points out that imposing a 1940 Act US Mutual fund style requirement to UK Boards is likely to mean there is less time to execute other core duties.

BlackRock would recommend that the FCA carry further analysis of importing a US governance model as well as explore other European models in comparing the regulatory, legal and market conditions and to identify the drivers for trends on pricing in the each market before considering importing a particular practices into the UK. We would be happy to assist in this process. F – Greater duties on trustees and depositaries: If the focus is on value for money and end client experience, it is not clear how the trustee or depository would be in a position to obtain or access the information to add additional value to fund governance in these areas. They would need to add considerable expertise in portfolio and risk management to be able to make the value judgment. They would also need to build relationships with distributors which is not aligned with their normal day to day business activities. Given recent enhancement to depositary liability and asset oversight standards in the UCITS V Directive and the AIFMD we believe that this would almost inevitably lead to additional costs to the end investor and generate potential conflicts on interests as AFMs are primarily responsible for setting trustee and depositary fees and obtaining value for money for end investors. Do you have views on how firms should demonstrate that they have acted in the best interests of investors? Based on our definition of acting in the best interests of investors, AFMs should ensure and demonstrate that products made available to investors are managed in line with the prospectus objectives, policies of the firm and any other materials provided by the manager. A clear demonstration of the potential risks, performance and outcomes of a given strategy as well as the likely costs involved all form part of effectively demonstrating value for money. A further suggestion would be to include an indication of the variability of outcomes expected (in the context of time horizon etc.) on publications and marketing material to ensure that investors are well informed Do you have views on how governance should work to ensure firms act in the best interests of investors? Drawing upon the most appropriate and proportionate elements of the options suggested above and developing an evolved governance structure based on a combination of options A,B and C noted above could be an effective approach to enhancing the existing governance framework. Are there any logistical challenges and unintended consequences that should be taken into account? If so, how could these unintended consequences be overcome? This will ultimately depend on any regulatory action taken however, if significantly greater attention is needed on manager fees, for example, then the additional time requirements on boards to source and assess the additional data requirements implicit in new standards will need to be assessed as part of a comprehensive cost benefit analysis. As noted above the implications of appointing a significantly increased number of independent directors to boards also need to be assessed as part of this cost benefit analysis. Furthermore a focus on fees, which is an easily quantifiable and very visible matter, can easily become the primary focus of the board and de-prioritise other features of the truth to label concept and duties on AFMs under current legislation and regulation. The additional requirement for non-executive directors may increase costs which could, in some cases, be borne by investors as well as create clustering of NEDs and, logistically this may also hamper the board’s ability to operate effectively. Considerations should be made to ensure that any additional requirements do not significantly impact ability to innovate and time to market in the industry as the reduction in competition will not be in the investors’ best interests.

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Are there advantages to the FCA recommending the government introduce a fiduciary duty by statute which could not be achieved through regulatory reforms? We support the detailed analysis provided by the Investment Association on this point and in particular to the detailed study conducted by the Law Commission in 2013/14 which recommended that an additional fiduciary duty would be of limited benefit. We believe the time would be better spent on the ongoing development of best practice guidance and standards by the FCA and the Investment Association. Are there better alternative supply side remedies that would encourage asset managers to demonstrate that they are providing value for money? Asset managers have been competing with each other to deliver value but do not necessarily have any material influence over whether the benefits of this competition are passed through to end investors. Many industry participants along the supply chain of intermediation, including platforms, IFAs and others, perform an important role and often add significant value. Nevertheless, asset managers generally do not have transparency into the cost base of such providers and are therefore not in a position to assess value relative to cost. The Retail Distribution Review (RDR) brought about some significant changes to the supply chain within the industry which benefited consumer outcomes, however, there are still some legacy issues, such as trail fees to IFA’s through historic share classes that should be reviewed. One alternative might be to define a finite period in which such legacy share classes can be offered to investors from intermediaries. Whilst asset managers have created cheaper (unbundled) share classes for newer investors and notified them of the availability of cheaper alternatives in order for them to act, much is still dependant on investors switching out of the old share classes into the newer ones. We support that greater disclosure of cost and charges as well as clearer objectives and transactions costs may be necessary however, given the intermediated nature of the market in the UK, there is a need for greater education to investors through the intermediated chain. We also note that the forthcoming cost disclosures in MiFID II are designed to provide full cost transparency not only in percentages but also in pounds and pence through the full chain of intermediation allowing investors to assess and compare the relative costs not only of asset managers but also of relevant intermediary services. We believe that the FCA could usefully focus on quality of information being provided in industry reporting templates being designed to meet the requirements of MIFID II to ensure investors have all the information they need to make an informed choice.

Introducing an all‑in fee so that investors in funds can easily see what is

being taken from the fund. We would welcome views on: The likely effectiveness and proportionality of the: Single charge remedy to incentivise asset managers to control the charges taken from funds. The specific options (A, B, C, D) set out BlackRock broadly agrees with the FCA’s view of using a fixed OCF as an industry standard to product pricing and the conclusions made by the FCA that this approach could create greater simplification of the charging approach taken by AFMs and generate more certainty for investors around charges. Indeed, BlackRock employs a variance on this approach already for some of its fund ranges.

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In particular, BlackRock believes it will help investors compare products and also increase their certainty around what charges they are paying in relation to a fund. However, we do not agree that a fixed OCF will necessarily result in incentivising fund managers to control the charges taken from funds any more than the current variable OCF model and in fact could have some unintended negative consequences which we provide more detail on below. Furthermore, consideration should be given to different fee models within the fund market. For example it should be noted that ETFs typically employ an all in one fee structure already through the Total Expense Ratio (TER) where an ETF pays the fees, operating costs and expenses as a single flat fee. This excludes transaction costs. Whilst we welcome greater industry standardisation around the use of OCFs and what is included in the charge, BlackRock believes that due to the unpredictable nature of transaction costs, these should remain separate from the OCF. When stating transaction costs, this is describing the cost of trading activity but does not include the cost of research or broader, non-transaction relevant functions that AFMs require to directly perform the investors transaction. BlackRock recommends that this is further defined in future guidance to ensure alignment with the direction internationally. Setting a fixed level of transaction costs up front as suggested by Options C and D could lead to unintended outcomes and conflicts of interest as it may encourage managers either (i) to be disingenuous with their estimations so as to seek a competitive advantage; and/ or (ii) to suppress their trading activities in order to reduce transaction costs, which may not always be in the best interests of the investors or deliver the best outcomes. We set out below a number of scenarios which should be separately reported. Initial and exit charges Initial and exit charges should remain outside of the OCF to prevent investors from using certain funds in unintended ways. For example, active products are by design, intended for longer term market cycles and the preventative measure entry and exit costs are designed to protect investors. Swing pricing We would exclude the effect of swing pricing from the calculation of transaction costs given that this process is by its very nature designed to protect ongoing investors and does not represent a transaction cost. In dual-priced and single-priced funds the fund spread or swing provides the anti-dilution mechanism to offset or cancel out transaction costs. This is equally true for single- and dual-priced funds; however, the different mechanisms used will lead to different outcomes for incumbent versus transacting investors. The aim is that transacting investors should pay for the costs associated with their flow and that incumbent investors are protected. As more generally, for exit and entry charges we believe the costs of transacting in a fund by an individual member should be reported separately. Securities lending Securities lending costs are another example of costs which should be separately presented and where we emphasise the need to give contextual information to investors, in particular, on the additional revenue generated, to assess the value for money they receive from this activity.

Securities lending as an activity is additive to fund returns. Either funds do not lend and no additional revenue is generated or costs incurred or funds decide to lend and the fund receives additional revenue less the costs incurred by the securities lending agent for sourcing that revenue. Securities lending can be conducted on behalf of the fund by a variety of different lending agents who may or may not be an affiliate of the manager and a consistent and transparent presentation is key to comparing returns between different funds. In terms of

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comparing value for money managers will want to account to governance bodies for both the additional revenue generated and the cost of generating that revenue. Without this context portfolios which engage in lending activities will appear more expensive than portfolios which do not. This will also avoid scenarios where an investment firm is incentivised against lending securities simply to minimise costs even though this may come at the cost of lower returns. We suggest the following method of consistently disclosing costs of and the revenue and performance generated by securities lending:

Total gross income generated by securities lending

The Lending Agent fee as both a dollar value and percent

Other fees incurred by the funds elated to lending

Net income to the fund generated by securities lending Performance fees BlackRock also suggests that performance fees are also kept separate from the OCF due to their nature and the impacts this may have to investors’ ability to consistently compare costs. Any unintended consequences of: Single charge remedy to incentivise asset managers to control the charges taken from funds.

- The specific options (A, B, C, D) set out above As set out below, we believe that a combination of utilising remedy options A and B would be most feasible. A: The current OCF becomes the actual charge that is taken from the fund: This option set out by the FCA largely aligns to practices already adopted and therefore, by aligning AFMs to this approach, will facilitate easier comparison for investors thus increasing competition and improving competitiveness of pricing. This option may also represent the cheapest and most efficient solution for the industry. B: The current OCF becomes the actual charge, with managers providing an estimate of any implicit and explicit transaction costs: BlackRock agrees with the FCA’s option of introducing a standardised OCF with AFM’s providing investors an up-front ex ante estimate of and actual ex post annual figure for transaction costs including research costs (where managers choose to continue to charge clients separately for research). This approach aligns to incoming EU regulations (PRIIPs and MiFID II) and the recent regulation on disclosure of transaction costs for workplace pensions. It is important that the disclosure is standardised across the industry so that the potential for estimates to be different to the actual disclosed transaction costs is minimised in order to mitigate the concerns around disingenuous estimations outlined above. Fund managers should be required to explain to investors why any estimates differ from the actual costs. The disclosure of transaction costs is challenging and BlackRock has provided a full response on this subject and its views on different calculation methods in its letter dated 4 January 2017 to the Strategy and Competition Division of the FCA regarding Workplace Pensions.2 This option would also allow investors to achieve an easier comparison across AFM’s at transaction costs levels as well as OCF although transaction costs are not a relevant fund metric for fund comparison on a stand-alone basis without consideration for performance. It is important to delineate transaction costs which are purely part of implementing the investment strategy from those that are part of the asset management operation which should be addressed as a result of MiFID II. As noted above, it is important to delineate between other costs such as securities lending, performance fees, research payment accounts reporting under MiFID II and other such transaction based costs.

2 See https://www.blackrock.com/corporate/en-gb/literature/publication/transaction-cost-disclosure-

workplace-pensions-fca-010417.pdf

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C: A single charge which includes all charges taken from the fund, including both implicit and explicit transaction costs, but with an option for ‘overspend’: BlackRock believes this option represents a less optimal approach for investors as a potential reaction of AFMs would be to inflate the OCF to prevent having to use the overspend allowance and indeed to be conservative and avoid having to subsidise the fund. A more appropriate approach would be that of option A or B. D: There is a single charge which includes all charges taken from the fund, with no option for overspend: As noted above, this would not be in the best interested of clients and AFM’s would be further incentivised to overstate costs or may be dis-incentivised to act in the best interests of the fund, forgoing any further transactions that would raise the costs above those that have been accounted for in the overall charge. This could result in the portfolio manager trading in a way which is not entirely aligned with the best interests of the investor. We would argue that as performance is shown net of transaction costs fund managers are already incentivised to proactively manage these costs to the extent they can. We support the detailed analysis conducted by the Investment Association of the unintended consequences of both Options C and D. How we can overcome any of these unintended consequences. One potential solution would be for the OCF to be reviewed every year to coincide with the publication of the KIID and as part of the review to be either increased or decreased (perhaps with post event notification of the former). There should be standardisation across the industry on what is and is not included in the OCF. If the process for changing the OCF is not standardised through regulation and/or is onerous it is possible that this will encourage AFMs to set the OCF conservatively and be hesitant in revising the figure downwards even where the actual costs of running the fund might permit this on the basis of the challenges and cost of having to adjust the OCF upwards in future years and in particular the likely negative response from investors were it needed to be increased. It is important to note that fixing the OCF does not in itself translate to economies of scale being passed on automatically but through more competition due to comparable OCF, rates might be driven down. Finally, when considering the implications of an AFM’s all-in fee, it is important that further consideration is made to costs applied to investors outside of the AFM’s product control i.e. distribution or platform fees. In this respect it is essential that reporting standards adopted by the wider industry as part of the implementation of MiFID II fully break out the additional costs of intermediation for investors so they can assess how they have achieved value for money from each part of the value chain. Do you think that the scope of this remedy should be limited to retail investors or should it be extended to other types of investors? BlackRock believes that this remedy should be applied to all regulated pooled funds. As noted by the FCA, pricing competition is in place within the institutional investor space however, where institutional investors and retail investors are comingled in a pooled vehicle it makes sense for the pricing structure to apply to the fund as a whole (even where different investor types are accessing different share classes). Whether there are better alternative remedies or pricing models that would encourage asset managers to control the charges taken from funds? BlackRock notes the FCA’s observations regarding fees based on performance and the view of dynamic pricing enabling reduced costs to be passed onto investors when asset raising is high. Though in theory these approaches are sensible, there are some challenges to them. The operational challenges connected to delivering fees based on performance to retail investors who are able to subscribe and redeem on a daily basis and who each have a separate performance experience typically prevent these fees being used on a wide scale basis.

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On dynamic pricing, BlackRock does not agree that there are automatically economies of scale that can be passed onto investors as a fund increases in size. For example many direct costs to the funds are ad valorem rather than fixed in nature and therefore do not reduce proportionately as AUM increases such as custodial fees. Also as a fund grows in size, it poses new challenges in terms of how to implement the investment strategy and continue to find new investment opportunities. Where there is a correlation between size and the costs of running the fund, there may be benefits to investors however, as market conditions worsen and larger or smaller investors redeem the resulting increased charges would act to the detriment of investors who retained units in the product. This could also create additional redemptions to occur from the product, compounding the issue further. BlackRock supports the FCA’s observation that investors may find difficult to understand fund charges and the study’s suggestion of moving to a ‘pounds and pence’ equivalent and has called for this approach to be adopted for a number of years.3 However, we feel that for this approach to be successful, all other changes applied on the investor throughout the value chain (e.g. platform fees and distribution fees etc.) would also need to be demonstrated in this way and welcome moves in this direction from January 2018 as part of the implementation of PRIIPs and MiFID II. Do you agree that risk-free box profits should be used solely for the benefit of the fund and not be permitted to accrue to the asset manager? BlackRock agrees with the FCA’s view that risk-free box profits should not be accrued by AFMs and does not incur any box management profits for running a box on our dual-priced unit trusts

Measures to help retail investors identify which fund is right for them Would it be proportionate and effective to require fund managers to be more specific with investors by clarifying an upfront objective and tracking performance against that objective over an appropriate time period? BlackRock believes there is already a high-level of regulation around fund investment objectives and policies and the right balance has been found between providing meaningful and proportionate disclosure in formal fund documentation such as Prospectuses and KIIDs. Furthermore, authorised funds must be approved by a competent authority and there is already much scrutiny on investment objectives by the FCA on documentation provided both on initial authorisation of a fund and when changes are made to its objectives. It is also important to target information to avoid providing too much information which is likely to overwhelm retail investors, cause confusion or might inadvertently restrict fund management decisions through being overly prescriptive thus negatively impacting the outcome for investors. BlackRock’s understanding of the FCA’s question is that by “objective” the FCA is referring to the intended outcome (i.e. a return/growth target) rather than a fund’s broader investment objective and policy of investing in European equities for instance. Fund managers are already required to disclose an objective for a fund upfront. The objective need not include a specific level of capital growth or income but a high level outcome such as “long-term capital growth”. We understand that there is no industry standard definition of terms such as “long-term capital growth” and therefore comparing whether one fund is more successful at meetings its objectives than another may be challenging for some investor types. Where a fund’s investment strategy is constructed around a reference/performance benchmark and it is in effect seeking returns or an outcome relative to that benchmark we think this could be clarified for investors. At the moment many funds have relative benchmarks for performance comparisons but it is most likely unclear to retail investors why these benchmarks

3 See ViewPoint: Restoring Investor Confidence at https://www.blackrock.com/corporate/en-

gb/literature/whitepaper/viewpoint-restoring-investor-confidence-dec-2011.pdf

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are being used because the high-level outcome the fund is trying to achieve is not always explicitly linked to the benchmark. BlackRock does not believe that it should be mandatory for a fund manager to state a specific level of return in a fund’s formal investment objective. In particular, defining an objective in this way means that it is impossible to predict for an index tracking fund the level of return that index will achieve over a particular time horizon. Furthermore, there will be funds that may not reference any benchmark or track an index such as some alternative strategies including Real Estate. This could cause retail investors, in particular, to choose a fund purely on the basis of that target return without appreciating the variability around it and the specific risk related to that exposure or strategy. It also poses the question of how the targets are set in terms of the expectation of meeting these and analysis that has gone into deciding on the level (in terms of back-tested data, model portfolio, stress testing of portfolios etc.) and whether there will be a standard industry approach for setting these. BlackRock has only chosen to include specific return targets on a limited number of multi-asset funds where it is felt that the fund strategy and benchmark (e.g. cash) supports this approach. We are of the view that an industry consistent approach to classifying the outcomes of certain categories of funds and what they are trying to achieve, similar to what is in place for Absolute Return Funds could be more beneficial to investors. This should help investors chose what type of fund, at a high-level, is right for them and also make meaningful comparisons between similar funds. For example, the FCA could prescribe that all active funds with a relative performance benchmark should, as a basic requirement, be aiming to beat that benchmark, net of fees, over a market cycle (the fund manager to define what time period might reasonably be expected to be a market cycle for the particular asset class/sector in question as part of its MiFID II target market assessment). For index/tracking funds (including ETFs) the FCA could provide a further classification that explains that these strategies are seeking to track the performance of a particular sector/market as represented by the relevant benchmark index. This kind of industrywide clarification should help investors better understand what they are paying for (e.g. the opportunity of alpha/returns). For active funds which express their objective as an outcome without reference to a specific index benchmark such as “equity-like returns with less volatility” then funds should be able to show their performance against that outcome. There are more challenging classifications of funds where it is less simple to prescribe a single approach to demonstrating the fund’s performance against its objective, for example managed volatility funds or target date funds where the objective is extremely long-term and where relative performance is less important than the probability of the fund being able to deliver a target income. We do believe there would be value in the FCA requiring fund managers to demonstrate the fund’s performance against its objective using a relevant benchmark or target objective. How should fund managers and other market players communicate to allow investors to judge success over an appropriate time period? In what circumstances would it be appropriate to provide comparators, for example, performance of passive funds in the relevant market? In terms of defining an appropriate time period, some funds have an explicit time period attached to their objective such as absolute return funds (as required by UK FCA regulations) whereas others use generic terms like “over the longer term”. The UCITS KIID document, and the forthcoming PRIIPs KID for AIFs, however, do require that a recommended holding period for the fund is stated and it is our belief that an investor would understand this minimum recommended holding period to relate to the period of time over which it is expected that a fund’s objective can be achieved. There may be some merit in making this clearer through an explicit statement around the time frame (even if only approximate or expressed as a range) over which an objective might be expected to be achieved where fund managers do not already do this. BlackRock notes that the asset management industry is working on a standard template for target market definition under MiFID II which sets out more specifically recommended time horizons for specific products If the FCA decides to prescribe/standardise minimum holding periods then we would welcome the opportunity to respond to a consultation on this and ensure that is consistent with the MiFID II distributor and investor reporting

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requirements and ensure that this does not create unintended consequences for globally distributed products. There are some publically available tools which allow investors to compare funds’ performance over the same time period. We also understand that some fund platforms and many financial advisers can (and should) provide this information. With regards to performance comparators, whilst the use of mainstream indices as benchmarks to group together funds for comparison and the various sector classifications that data providers and/or industry bodies use are high level and do not perfectly bring together comparable funds, our view is that these are adequate and will develop further over time. There is a danger that more specific classifications will cause confusion for investors who may not be able to understand the features of the strategy that has led to the more granular classifications. Investors could end up making arbitrary decisions when trying to assess which sector/fund classification to look at as a starting point for selecting a fund to invest in. Likewise an unintended consequence of requiring more specific, customised fund classifications/sectors is that the number of funds within these is reduced to the extent that comparison within the smaller sectors becomes less meaningful. We believe that retail investors are typically looking for a range of specific investment outcomes and seek exposure to funds reflecting a specific market/asset class/sector as part of a diversified savings solution. BlackRock believes that the current use of benchmarks and sector classifications is probably sufficient to group together broadly similar fund strategies for the purpose of making broader investment decisions. If a retail investor wants to access a more specific investment strategy that they should seek professional advice to help them with that decision and BlackRock would expect any professional adviser and institutional client to understand the shortcomings of the current data providers’ sector classifications and use of benchmarks to group funds together for the purposes of making comparisons. However, there is always scope for improving classifications and BlackRock works with other fund managers and industry bodies (such as the Investment Association) to do this. For example, the use of derivatives that may have the effect of exposing the fund to markets/sectors/instruments that otherwise would not be apparent from its investment objective or benchmark, are adequately addressed in fund groupings and classifications. One area where current sector classifications and fund groupings need more immediate attention is that of index strategies where vendors tend to either not review these strategies or attribute a generic rating to them which does not assist in investor comparisons. In conducting analysis of the impact of rating agencies it is worth noting that the majority of product recommendations to the end consumer are shaped in some way by third party ratings which the fund has achieved yet these activities are unregulated. Similar considerations should be given to those groups which provide independent risk ratings. Again, the suitability of a fund for a consumer is, in part, decided by the risk rating which has been given to a particular product. As with index provision, investors may benefit from greater transparency as to the criteria used by the various industry rating bodies. As noted within the Interim Report, fund ratings provide investors with a sense of accreditation and have been seen to steer investors towards selecting the products they invest into. As this information has become key to the way retail investors select their products, it would seem logical that the FCA conduct an assessment of the accreditation processes used by these firms. In addition, the FCA have suggested that the use of composite benchmarks which more reflect the constraints/flexibilities within a fund’s strategy could be used to help measure performance and possibly also for comparison purposes. It is important to use a benchmark that is consistent and transparent, something that the Benchmark Regulation is seeking to achieve. Likewise a composite benchmark that frequently changes to reflect the flexibility within a fund’s investment objective would be of little use in this specific context and such a proposal would add further complexity for investors. We believe that further dialogue in this area would be useful

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Should we set out our expectations on using benchmarks, particularly when benchmarks are used to trigger performance fees? BlackRock would suggest that further analysis be conducted on how benchmarks are used. As a general rule the purpose of a performance fee is to reward the asset manager for outperformance of the fund. There are typically two types of reference points used to determine outperformance:

(i) a hurdle rate is a target level of performance that must be achieved before a performance fee becomes applicable (e.g. LIBOR + x%), or ;

(ii) a benchmark rates, such as an index can be used to determine the outperformance of a fund (e.g. FTSE 100 + x%).

In general, funds with a relative performance target are better suited for using a benchmark as, whereas absolute return funds benefit more from hurdle rates as reference points. This does not preclude that a combination of the two references might be better suited to the investment objective of a particular fund. The choice of a reference point should reflect relevant criteria such as the investment objective of the fund, its risk parameters and the eligible investment universe. If a benchmark is used as a reference point for the calculation of performance fees, we believe the use of the benchmark needs to reflect ESMA Guidelines on the use of benchmarks within funds and follow the below criteria:

(i) The benchmark needs to be adequate and/or appropriate to the fund’s investment objective and must not give rise to any conflicts of interest.

(ii) The fund providers aim to make the used benchmark available to its investors, unless they are already publicly available.

If a hurdle is used as a reference point for the calculation of Performance Fees, the hurdle needs to be described in adequate detail to be fully transparent to the investor.

As noted in the Interim Report, “Investors are also increasingly seeking absolute returns, rather than returns relative to a benchmark” BlackRock’s own Investor Pulse survey (which includes responses from 4000 UK retail investors4), along with other market research, indicates that a significant concern for the end investor is not to lose money and a rationale as to why such a large proportion of people’s savings remain in cash. Investors are trying to save and invest for their financial futures and achieve a return higher than keeping their money in their bank account. The FCA’s Interim Report focuses heavily on benchmark comparisons yet a fund’s benchmark is merely one way of assessing a product’s performance. Indeed, the report identifies that in fact beating a benchmark “may not be what the investor is trying to do”. A true understanding of what a fund is trying to achieve in various market conditions is more important and increasingly, active funds are agnostic as to what securities make up their benchmark. Consideration should be given to a fund which has a particular style which has rigidly remained in line with its investment objective despite that particular style being out of favour in the investment markets. In this example, the AFM has not necessarily done a bad job because he/she has “underperformed” his/her broader benchmark. Additionally, a fund will also be used by multi-managers who blend certain styles to give a particular outcome to a client and will not always be unhappy with that fund’s performance. It is therefore important to consider the benefits of the use of products for diversification purposes which may serve to reduce risk over the long term and perhaps protect against inflation.

4 About Investor Pulse: BlackRock’s survey was conducted on 4,000 adults aged between 25 and 75 in the UK. The

fieldwork was conducted during August and September 2015. A summary of the findings is available at: https://www.blackrock.com/uk/individual/literature/brochure/global-investor-pulse-uk.pdf . The results of an updated study are expected in April/May 2017. The survey was conducted on both affluent and mass retail consumers. The threshold for affluent consumers was a requirement to hold more than £100,000 in household assets (not including residential property assets). The sample focused on household decision-makers in households holding savings and investments. This included some households

with savings only. Around one-in-five households in our UK survey held no savings or investments at all.

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Should managers be required to take action when funds are persistently underperforming and, if so, what form should this action take? BlackRock already takes into account common factors such as total return outcomes, risk adjusted returns and performance attribution when assessing and appraising the investment performance of the funds and segregated mandates and continually takes steps to address performance issues. This requires boards of AFMs to:

Analyse the drivers of performance and risk through in depth review and attribution analysis across both short term and longer term time horizons.

Analyse other relevant factors such as the effect of market conditions or disruptive events.

Assess the effectiveness of the investment process being applied.

Consider whether incremental modifications to the investment process are required.

Consider whether modifications to investment teams themselves are required.

Consider whether BlackRock should continue to manage that investment strategy, or whether the investment objectives for that strategy continue to be appropriate

However, an important point in this discussion is what qualifies as underperformance and this ties in with the FCA’s point around ensuring that a fund’s objective is clear and its performance against it is measurable. Loss and risk do not necessarily equate, in of themselves, to under/poor performance as much depends on the outcomes investors and their advisors are seeking to achieve. An individual investor’s experience of a fund’s performance is personal and complex and cannot necessary be understood by simply looking at the fund’s performance. For example, investors may use index funds or ETF’s to hedge a partial exposure to a wider portfolio and therefore would have a different perspective on performance relative to a buy and hold investor. This question is challenging not least because it requires a definition of “persistently” poor performing. BlackRock believes it would be difficult to attach a definition to this without oversimplifying it, resulting in the risk that investors realise a loss which might otherwise have been quickly recovered within the fund or their wider portfolio. There is also the risk that any regulation to this effect does not recognise volatility within a fund’s performance and the benefit that can come from this for investors who are actively taking views on the market. Certainly any view on the meaning of “persistently underperforming” would have to be taken within the context of the recommended holding period for a fund. Any regulation on this point cannot accurately take into consideration an individual investor’s experience which will vary depending on when they invested in the fund. Nor will it be able to take into consideration an individual investor’s circumstances for example whether they are invested in a particular fund as part of a broader portfolio with an overall objective that the fund in question meets regardless of its performance (i.e. is the “underperforming” fund being used to hedge another exposure within their portfolio), whether the fund is being held as part of an extremely long-term strategy such as target date where even relative under performance for several years in a row might be tolerated versus the cost of realising a loss and moving to a different fund. BlackRock recognises the FCA’s view that some investors, particularly retail investors, have a tendency to remain in poorly performing funds for longer than one might otherwise expect. Our own experience and view from analysing market data suggests that performance is still the most persuasive factor in the gathering of and loss of AUM. BlackRock believes that a fund that experiences poor performance over a period of time is more likely than not to experience outflows even though these may be delayed for instance by the timeframe its takes for an investor, such as the trustee of a pension scheme, to carry out the due diligence on an alternative fund and then initiate the change in investment process to disinvest from one fund and invest into the other. Other factors, such as market reputation also influence AFMs to proactively look at the performance of their funds and make changes to improve this. BlackRock acknowledges that AFMs with different distribution models to its own may not feel such direct or immediate pressure to take action from their investors as a consequence of poor performance in their funds, for instance those with captive distribution. There is a fine balance

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between acting too soon and realising losses within a portfolio and potentially incurring trading costs to adjust a strategy versus maintaining a position in the expectation that any losses will be short-term and recoverable. It would be a perverse outcome if regulation resulted in an increase in the former. Is there a role for the regulator in ‘shining a light’ on poorly performing funds and if so what form could this take? BlackRock does not believe this should be the role of the regulator particularly as the term underperformance can be subjective. As noted above, this is a complex matter and we believe that for most investor types their response to poor performance will cause fund managers to react to try and rectify this. The exception may be, as mentioned above, instances where the fund provider primarily relies on captive distribution channels.. We also believe that intermediaries and advisers should play a part in highlighting poorly performing funds and encouraging investors to respond to them. Additionally, individual investors would benefit from better advice and education to allow them to consider performance in the context of time horizon and risk/reward criteria. We also note that there are a number of commercial investor organisations and publications which assess and publish their assessment of the relative performance of various funds. Consumers already have access to a number of data sources to assess performance – the development of more standardised reporting under MiFID II is also likely to drive the development of more cost comparison tools. We believe the FCA should monitor the effectiveness of these tools before deciding on further intervention in the market. Are there likely to be any unintended consequences and, if so, how could they be overcome? One possible unintended consequence of the FCA shining a light on what it perceives to be poorly performing funds is that such intervention may cause the majority of investors in particular fund to sell their investment at an inappropriate time (i.e. when markets are low and dilution levies/adjustments apply). This could also lead to discussions focusing more on short term performance as well as the implications of the costs of switching products and reinvesting in other products which may not be in the interests of investors. Are there other metrics/indications/pieces of information that could give investors better insight into likely future returns? We believe that trying to illustrate potential future returns is problematic. While past performance is not a guide to future performance there a number of reasons to show past performance such as historic proof of an active manager’s ability (or not) to regularly outperform the fund’s benchmark or an index fund’s ability to replicate the benchmark index. It is also counter-intuitive to base the estimated future performance scenarios on the basis of historic performance data without making that disclosure more explicit to investors, or ultimately showing that historic performance as well as unfortunately the case with the forthcoming PRIIPs presentation. The UCITS presentation of performance also demonstrates the volatility an investor may encounter and has detailed rules to stop firms manipulating the data, whereas the PRIIPS scenarios necessarily suggest smoothed performance paths. We therefore believe that it is important that funds be able to show past performance alongside future performance scenarios to illustrate the ongoing effect of market volatility,

Making it easier for retail investors to move into better value share classes Do you agree that the focus of any remedies in this area should be on investors in scenarios 2 and 4 outlined above?

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BlackRock agrees that the focus of any remedies in this area should be focused on situations where investors have contractual relationships with market participants as demonstrated by scenario 2 and 4 however, a proportionate view should also be taken on scenario 1. What would be the most proportionate and effective way of moving investors into cheaper share classes? It is important to note that in the case of intermediated investors, the total cost of ownership should be considered both from the AFM’s and the intermediary’s perspective. In addition we note that share classes are not solely differentiated by price but also by investment exposure and/or whether or not dividends are distributed or accumulated, where relevant. For example, BlackRock’s ETFs use share classes to deliver currency hedging or accumulating/ distributing share classes which may have different price points to reflect the different features of the class. Therefore when considering “moving investors into cheaper share classes”, it is important to ascertain that the share classes are comparable. Providing a client meets the investment criteria of the share class they intend to switch to, BlackRock provides free share class conversions to its contractual clients. As noted above, Retail Distribution Review (RDR) brought about some significant changes to the supply chain and whilst asset managers have created cheaper (unbundled) share classes for newer investors and notified existing investors of the availability of cheaper alternatives in order to encourage them to act, much is still dependant on investors switching out of the old share classes into the newer ones. In order to investors to switch to another share class, an explicit investor instruction is required in order for a switch to occur. The most proportionate and effective way of moving investors affected by this scenario could include annual mailings to investors where a direct contractual relationship exists, informing them of the options that may be available to them. However, not all investors may meet the criteria of the cheaper share class and as such, other options would include securing improved pricing if additional investments were made and exploring alternative approaches to investing if these criteria cannot be met. Additional costs would also need to be considered by the investor in this scenario such as Capital Gains Tax. Furthermore, should a firm wish to close a share class, firms have to redeem shareholders who have not provided an explicit investor instruction to transfer to a cheaper share class. This may not be in the investor’s best interests as not only may this impact the investor’s performance but also may attract additional tax liabilities for the investor. We would welcome further consideration by the FCA on how managers can move investors into better value share classes using their existing powers and subject to appropriate disclosure. Can you provide an estimate of the cost of moving investors to cheaper share classes and how these costs would arise? The costs associated with moving eligible investors to cheaper share classes would include annual mailings, the handling of written confirmations and the switch of these investors to a cheaper share class. Costs of this kind would usually borne by BlackRock at a business entity level and are not directly allocated to specific funds or investors. However, it is important to note that in order for investors to be eligible to access cheaper share classes they must meet the investment minimums of the share class they wish to invest in and therefore may need to increase their investment. Those who were unable to meet the investment criteria of a different share class would need to carefully consider the costs associated with switching their investments to an alternative distribution channel where a cheaper share class could be accessed. The cost and resource implications derive from communicating with direct investors who qualify for this class, handling confirmations and repeating this exercise annually.

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Are there any potential unintended consequences of remedies in this area? Currently, switching clients to a cheaper charging share class would lead to a change in the way investors’ access funds i.e. direct investment as opposed to investing through an intermediated provider. As a result, the investor may be subjected to other costs (e.g. administrative, tax etc.) associated with switching from an intermediated to a direct investment as this would represent a redemption and re-purchase.

Requiring clearer communication of fund charges and their impact at the point of sale and in ongoing communication to retail investors What is the likely effectiveness and proportionality of: Remedies which aim to introduce further cost transparency and aim to encourage retail investors and their advisers to become more price sensitive

We would be supportive of regulation that creates greater uniformity and consistency around the charges and distribution cost information provided to investors once they have chosen an investment product, but again this will need to be provided at the intermediary/ distributor level to have effect for the end investor. As noted above we believe that the FCA could usefully focus on quality of information being provided in the industry reporting templates being designed to meet the requirements of MIFID2 to ensure investors have all the information they need to make an informed choice. The specific options (A, B, A+ and B+) set out above and alternative remedies that could be introduced

We would therefore recommend that fund charges on KIIDs and fund literature remain represented as basis points or percentages and that pounds and pence is deployed on ongoing reporting from the intermediary to the end client (i.e. option A+ and B+). We would also recommend that the actual pounds and pence charge incurred be displayed next to the total return so as to facilitate a greater understanding of the impact on investment

We would be fully supportive of presenting charges in £ amounts if it has been found by the FCA that such a measure would introduce further cost transparency and facilitate a better understanding of costs for end investors. However, the pounds and pence charging mechanism, by definition, would have to be calculated individually for each investor. The heavily intermediated nature of the industry means that asset managers do not always have full visibility of the end investors. As such, the £ charges would have to be calculated by the intermediary on the basis of data provided by asset managers. This would also ensure that charges displayed are fully reflective of the total cost to end investors by including the total cost of distribution to give end investors a better understanding of the overall impact of charges on their investment. Charges represented as pounds on KIIDs or other fund literature issued by the fund manufacturer, would have to be indicative as applied to a generic investment amount (e.g. £x per £10,000 invested) which would require a more complex calculation to interpret for the end investor and would not necessarily facilitate easier comparison of funds than a percentage or basis point representation of charges. We therefore believe that the pounds and pence representation of charges would only be effective at the intermediary reporting level. This is consistent with the forthcoming requirements on intermediaries under MiFID II.

We believe that option A and B would enable easier comparison of fund charges but should be accompanied by a disclaimer that distribution costs may also apply so as not to mislead end investors to believe that the fund charges presented are the entirety of charges they will incur. Option A+ and B+ more accurately reflect the final costs incurred to the end investor and thus better serve the intent of creating cost transparency and helping end investors understand the impact of charges on their investments. These options do not however, facilitate easy fund comparisons.

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What would be the most effective format and mechanism to increase investor awareness of the impact of charges? As stated above, we would also recommend that the actual pounds and pence charge incurred be displayed next to the total return so as to facilitate a greater understanding of the impact on investment. Would there be unintended consequences of: Remedies which aim to make investors more price sensitive and, if so, are there ways in which unintended consequences could be overcome? Displaying costs that do not reflect the final price paid by the end investor, i.e. costs displayed on the fund marketing material that do not take intermediary fees into consideration, may result in the end investor underestimating the total cost they will incur. Though we are happy to support greater cost transparency, we would suggest that this remedy is implemented by the intermediary (such as the platform or distributor) rather than at the asset manager level, where the asset manager does not have a direct relationship with the end client.

Additionally, making investors more price sensitive and less focused on the investment philosophy or objectives of a particular fund could have unintended consequences. Investors may place more emphasis than is due on price versus performance or objective and favour funds that are low cost regardless of their performance or outcome, which may not be in their best interests. Also, higher quality funds with justifiably higher prices (for whatever reason) may be unfairly, disproportionately penalised. The increased focus on price may drive down prices to the point that disables new entrants from participating as they cannot benefit from economies of scale, which would stifle innovation in the industry. It would also discourage higher cost strategies which would drive up the total OCF even though this may present a better overall outcome for the client The specific options (A, B, A+ and B+) above and ways in which we could overcome any unintended consequences? As outlined above, option A and B do not give end investors full transparency over the prices that they are incurring and so may lead to an underestimation of the true cost of investment. Conversely, option A+ and B+ may make the comparison of funds and investment vehicles more challenging since end investors would not be able to ascertain what proportion of the cost would be attributed to fund charges versus distribution. Thus a combination of the two charges would provide more useful information Are there better alternative options that would encourage investors to become more price sensitive? We do not believe that requiring investors to pay separately for their fund charges would provide a better outcome for end investors (particularly if they are required to pay by direct debit) as this would neither facilitate easier comparison of costs, nor would it highlight the impact of costs on the investments as reporting costs (in pounds and pence) alongside the fund performance would do. There is also the potential for unintended consequences such as what happens if an investor fails to pay their charges on time. Would the manager have the ability to recoup costs in another a way or would they be left with the unpalatable solution of having to redeem an investor’s holdings even if this resulted in unintended tax charges? What funds should be in scope of any remedies which encourage greater focus on charges? We believe that this remedy should be applied to all regulated pooled funds. As noted by the FCA, pricing competition is in place within the institutional investor space however, where institutional investors and retail investors are comingled in a pooled vehicle it makes sense for

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the pricing structure to apply to the fund as a whole (even where different investor types are accessing different share classes). What would be the most effective ways to communicate with investors? We support any initiatives for clear and consistent communication to investors and much work has been done already with the UCITS KIID which offers consistency of the different components of costs. However, differing EU legislation add inconsistency and confusion to investors such as the PRIIP KIID which does not offer the same clear descriptions of costs and performance. One way to highlight more effective communication might be to summarise a rate card of costs, charges, risk and intended outcomes similar to how food labelling works. Care must be taken that the focus is not purely on costs but highlights to an investor in easy to understand language what they are buying. If applied consistently, over time this will assist greater investor education.

Requiring increased transparency and standardisation of costs and charges information for institutional investors We would like views on: Whether institutional investors would benefit from standardised disclosure of asset management fees and charges? BlackRock is supportive of increased transparency on costs and the associated efforts to help improve the investors’ decision-making processes. Currently, an informal standard exists whereby information is provided as a matter of course however, a standardised disclosure of fees and charges would result in a material benefit to institutional investors. Reducing the inconsistent presentation of costs that exist today will allow for more meaningful comparison between providers, enabling investors to make better informed decisions. To date, a silo approach for improved cost transparency means there are currently four Regulations and Directives at EU level seeking to implement new requirements for cost disclosure. These are UCITS IV, MiFID II, PRIIPs and IDD with each containing differing technical provisions and requiring implementation over different timescales. A standardised disclosure of fees and charges would also ensure greater consistency for each of these proposals. We note the Investment Association’s work in the area to develop an industry wide disclosure code which is intended to meet a number of regulatory standards for transaction cost disclosure, returns, fees and research payment accounts. What fees and charges information should be included in a standardised disclosure framework? We set out below the fees and charges that we think should be included in a standardised disclosure framework. To achieve complete transparency, the fees and charges should include both those incurred or controlled by asset managers, and those that are paid by the fund or investors themselves.

Asset management charge (net of discounts and retrocessions)

Performance fee

Securities lending agent costs and net revenue generated

Administration charges

Accounting & audit costs

Registrar fees

Entry/Exit charges

Custody costs

Trustee fees

Trading/ transaction costs

External manager costs (where applicable)

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Index / license fees

Other Ancillary services We note the work being carried out by the Investment Association in this regard. Additionally, the Total Expense Ratio (TER) employed by ETFs as an all in fee already includes many elements of a standardised fee model. The TER is a single flat fee whereby the ETF pays the fees, operating costs and expenses associated with the fund. These will include the fees and expenses paid to the asset manager, regulators, auditors and certain other legal expenses but exclude transaction costs. What would be the cost to asset managers of providing information? The variability of the costs outlined above, within a fund or segregated mandate, would be linked to both the size of the individual fund/ mandate, and the operational complexity. Nevertheless, the costs of providing information are usually borne by BlackRock at a business entity level and are not directly allocated to specific funds or to specific segregated mandates. As a result, BlackRock does not directly reflect the increase in such costs, as related to a fund AUM, within the annual management fee applied. However, costs such as trading costs should be added to the management fees borne in the overall mandate, and seen in tandem with net performance. Irrespective of the aggregate amount of fees and costs, AFMs should be judged on their ability to reach/achieve the desired outcome. Would there be unintended consequences if trustees were required to publish costs and charges? BlackRock outlines below some of the key unintended consequences envisaged if trustees were to publish the costs and charges of the products they invest in (such as discretionary separate account) on a product by product basis.

There is a risk that the information published may lead investors to overly focus on costs and charges and not take sufficient account of the investment performance and risk profile of products.

There is a risk that a focus on cost alone will result in trustees compete on the basis of cost cutting and not focus on their overall duty to serve members and help them have the best products available in order to save for retirement

There may be a perceived lack of understanding between the costs published and what those costs cover leading to poor decision making

The disclosure of transaction costs could encourage AFMs to reduce trading activity or instil a cap on trading in order to reduce trading costs. Reducing such costs could also have an impact on the effectiveness of price formation if this leads to significantly lower market activity. Additionally, there is a non-linear link between transaction cost reduction and improved performance.

The publication of costs and charges by trustees would lead to examples of increased price clustering which may not be in the best interests of the investors.

We would propose that trustees publish their total costs and charges at an aggregate level (e.g. by asset allocation, active/ index management etc.), as part of a wider assessment of the value for money they have received ensuring the ability to negotiate on price remains. The scope of fund/products that this disclosure template should cover? Should it cover private equity strategies and hedge funds as well? The disclosure template should cover, where possible, a broad spectrum of products to encourage transparency across a broad range of products including, private equity strategies

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and hedge funds where there is a need for better disclosure and transparency of the cost mechanisms within alternative products. BlackRock would also be supportive in the application of a disclosure template to cover consultant firms as well and encourage consultants to publish the fees they have procured for clients as a measurement of their ability to achieve value for money for the consumer.

Measures to improve the usefulness and comparability of performance information used by trustees Are there better ways in which information could be presented to trustees, particularly member nominated trustees, in order for them to assess the performance of their scheme? How could this be achieved? What format should simplified and comparable disclosure take and who should be responsible for providing the information? The ultimate determinant of success at the scheme level is whether there is an improvement to the objectives that have been planned for. Trustees should start here when assessing performance. We have listed below the basis to which performance should be assessed. Performance of the underlying components. Performance information should be shown on either a net of fee basis, or both net and gross (including both the base and performance fees if applicable). The performance should be shown relative to the benchmark or the target. Performance of the scheme should be shown relative to liabilities and therefore showing improvement/ degradation of their funding level. Context. Performance should be contextualised over a determined time horizon for the amount of risk and expected objective outcome (either at scheme or product level). Comparability. It is important to understand the comparison relative to the stated objective. Most asset managers, unless managing a fiduciary mandate, will not be able to provide the information as most will not have line of sight over all the scheme’s components. The onus therefore falls on the trustees.

Exploring the potential benefits of greater pooling of pension scheme assets Are there ways in which parts of the institutional demand side (DB trust, DC trust and DC contract based schemes) could more effectively pool assets together? There are a number of ways that the industry can amalgamate assets for DB based schemes; both directly and indirectly.

1. Merging whole schemes: In this case, both the assets and the liabilities (for DB) are merged resulting in a single scheme with increased buying power.

2. Commingling assets: Where specific assets are commingled to increase buying

power but where the underlying schemes remain separate.

3. Governance pooling: Where a governance body is responsible for all decisions (e.g. sponsor covenants, manager selection, provider appointments) relative to multiple underlying schemes and assets without either the assets or indeed the schemes themselves being merged.

There are already a number of solutions that allow for the pooling of assets within DC.

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To what extent would pooling result in better outcomes for investors? There is significant evidence to suggest that good governance leads to better decision making and results in improved outcomes for institutional investors5. Therefore, where pooling leads to greater governance budgets, increased professionalism and more informed decision making, then better outcomes are more likely to follow. BlackRock believes that that options (1) and (3) in the previous answer provided above are most likely to lead to better outcomes for investors however it is recognised that option (1) comes with increased upfront costs. Further consideration of these options should be explored more fully. Commingling assets, whilst might improve buying power in some instances, there is limited evidence to suggest size alone improves investor outcomes. We believe that improved governance in option (3) captures many of the benefits of merging whole schemes without such significant upfront cost. Are there logistical challenges involved in pooling assets? How could we overcome these? By far the biggest challenge in pooling assets is governance; who is responsible for the asset allocation, risk return objectives, manager selection, etc? To overcome these challenges may require structural change in the pension industry. For example, a single governance committee responsible for the decision across multiple schemes would be one way to solve this problem. In the current regulatory framework, the merging of DB schemes can be difficult to achieve. This is primarily driven by most schemes being underfunded, with their own liability profiles, asset allocation, objectives and timeframes. It can be challenging for two sets of trustees to discharge their duties where such variations between the schemes may exist. BlackRock would welcome the opportunity to participate in further discussions around this option.

Requiring greater and clearer disclosure of fiduciary management fees and Performance We would like views on: Ways to provide trustees with clearer information about the charges and performance of fiduciary management. It is important to be very clear on the definition of fiduciary management, given the dispersion of styles and approaches between providers. Different levels of customisation and delegation exist across the market, which include varying approaches to strategic asset allocation, manager selection, controls on hedging strategies and approaches to alternative assets. Only a common definition would allow comparisons across providers and a true understanding of the value of the fiduciary management services ____________________ 5 In a recent discussion paper response issued by The Pensions Regulator (21st Century Trusteeship and Governance - Discussion paper response, December 2016, page 11) the ‘poor-good’ governance gap in terms of governance is stated to be worth at least 1-2% of additional return per annum based on past research.

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BlackRock believes that there should be clearer disclosure and transparency of fiduciary management fees. This should include transparency in a number of areas that were highlighted in response to the question relating to increased transparency and standardisation of costs and charges above. In addition, we are of the view that there should be a separate and clear overlay fee which covers the management of the fiduciary mandate. This should be distinct from the asset management fees for the underlying products or investment strategies. With regards to fund of fund structures that are sometimes used within fiduciary mandates, the transparency on these fees should also extend to the fees and charges of the underlying managers. There is limited evidence of a correlation between performance related fees for fiduciary mandates and the outcome for investors. However, where performance-related fees are included, there should be clarity on how they are charged and the benchmarks used to assess performance. BlackRock is supportive of providing clearer information to trustees on the performance of fiduciary mandates. This should include clearer explanations on how mandates have performed and meaningful attribution to the components that contributed or detracted from performance. In particular, there should be explicit and clear attribution of the performance of the fiduciary mandate relative to the objective that is set for the fiduciary manager, which is often linked to the pension scheme funding level. Given the substantial differences that can exist on the degree of delegation across fiduciary mandates, we also believe it is also important to be clear on the owners of the key decisions that contribute to the overall performance of the mandate. What information on fees and performance information should be made public and are there ways to benchmark the performance of fiduciary managers? Fiduciary mandates are often highly tailored and bespoke, and therefore there are challenges in being able to compare fees. Without clear context on the nature, scope and level of delegation, it may be difficult to draw meaningful conclusions when trying to compare fees if these were disclosed in a public manner. As a result, this may not achieve the objective of enabling trustees to make an informed decision or compare in a fair manner. However, fiduciary mandates come to tender through a well-structured, competitive, open-market tender process, with request for proposal (RFP) submissions requested from potential managers and BlackRock believes individual pension schemes have good transparency on fees and charges, and these are linked to the bespoke objectives, constraints and requirements of the pension fund. BlackRock also recognises that given the unique and tailored objectives of each fiduciary client, resulting in different risk and return requirements it can be more challenging to provide performance information for a public purpose. However, it would be possible to create standardised, anonymised, and consistent calculated performance metrics through the creation of client grouping with similar objectives. It is important that there is sufficient rigour applied to the methodology, calculation and review of performance metrics to ensure that trustees are able to reliably and confidently utilise the information. What are the unintended consequences of enhanced disclosure and how can we overcome them? Whilst providing further transparency to the market is important, this is one area amongst many that needs to be addressed to assist clients in making decision to appoint and monitor fiduciary managers. Any disproportionate attention in any single area, including enhanced disclosure on fees and performance, particularly without clear context could lead to poorer decision making.

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For example, there are a number of important considerations which may not directly feed through to performance that are relevant when selecting a fiduciary manager, which include risk management, strong reporting, partnering with the client and helping them evolve their strategy over time, training and governance model design. Fiduciary relationships and pension fund investment strategies tend to have long time horizons, and therefore care should be taken when interpreting and comparing performance metrics over shorter time horizons. Unlike a traditional mandate where the benchmark and performance can be measured in a more straightforward manner, evaluating the performance of a long-term fiduciary relationship can be more challenging. In our experience, we advocate the use of a balanced scorecard approach, which looks at all relevant dimensions of the relationship and provides a framework for a structured assessment combining both qualitative and quantitative metrics. Sufficient and specific trustee education and clear guidance can help to ensure improved understanding on fee and performance disclosure, how they should be interpreted and allow fair comparison between providers. What is the likely effectiveness and proportionality of guidance to trustees on these issues? Are there better alternative remedies that we can put in place to empower trustees in their decision making? What could any guidance from TPR/FCA to trustees in this area usefully cover? Effective guidance to trustees on these issues is likely to lead to better decision making and assist trustees in the comparison, assessment and selection of fiduciary managers. However, improving disclosure on fees, charges and performance in isolation is unlikely to meaningfully improve outcomes for investors. In particular, measures to improve the effectiveness, independence and governance of the selection process and ongoing monitoring for fiduciary managers is likely have a greater impact. In BlackRock’s experience, schemes with larger governance budgets have a more effective decision-making process resulting in better outcomes and any measure that can help strengthen the governance process of the trustees will improve the decision making process on these issues. This can include the use of independent or professional trustees or the use of an independent, professional organisation to assist in the search and evaluation of a fiduciary manager. In addition, there are potential benefits from a governance perspective in pooling pension scheme assets which is discussed in further detail earlier in the response above. Finally, targeted and specific trustee education and clear guidance can help to ensure improved understanding on fee and performance disclosure, how they should be interpreted and allow fair comparison between providers. This can also include specific guidance on how to select, monitor and oversee fiduciary managers

Consultation on whether to make a market investigation reference to the CMA on the institutional advice market and bring the provision of this advice with the FCA’s regulatory perimeter. We would like your comments on our provisional decision to make an MIR. Consultants play a critical role in the institutional market, one that is mandated by UK pension regulations, in order to assist trustees in pursuing the full funding of their schemes and the ability to pay retirement benefits to their members. The provision of high quality asset allocation and investment advice is, perhaps, the most critical determinant of success for investors in this space and there are consultants who provide high quality advice. However in certain cases, the quality of that advice is difficult to determine,

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or where the advice is subject to conflicts of interest, investors may be prone to making ill-informed choices. It is in the interests of end investors to have comfort that the consultant industry is working appropriately and we therefore welcome the provisional proposal by the FCA to make an MIR. We would also like views on: Whether the FCA should recommend that HM Treasury brings the provision of advice provided by investment consultants to institutional investors within the regulatory perimeter Legislation, specifically the Pensions Act 1995, means pension trustees are obliged to obtain and consider proper advice before making an investment decision. Many Trustees are not investment experts; therefore the requirement for them to take advice places significant responsibility on those providing this service. Given the importance of advice in determining the success or failure of the scheme objectives, it is sensible for this advice to be subject to appropriate levels of regulatory oversight which will also encourage greater levels of scrutiny by trustees and improving standards Whether to bring the provision of advice provided by employee benefit consultants to employers and trustee boards within the regulatory perimeter. BlackRock is of the view that advice, irrespective of who is providing this, needs to be monitored and reviewed to ensure the client’s best interests are always kept at the forefront. In doing so, it becomes possible to introduce proper oversight and ensure that appropriate assessment criteria and standards are set. Are there alternative remedies that we should also consider to allow better monitoring and assessment of advice provided by investment consultants and employee benefit consultants hat could any guidance from TPR/FCA to trustees in this area usefully cover? As noted in the FCA’s interim report, there is currently no agreed upon practice or standard for evaluating how investment consultants are performing for their clients. We recognise the issues identified by the FCA in measuring the effectiveness of the advice provided. Nevertheless, objective, regular and thorough monitoring and assessment is necessary in order to provide the trustees with a transparent mechanism through which they can challenge the performance of the investment consultant providing the advice. The transparency enabled by the introduction of standardised monitoring and assessment would also enable trustees to further scrutinise the consultant’s independence and the extent to which there is any conflict between the provision of advice and a consultants’ commercial interests, including the consultant seeking to manage the assets of its clients. BlackRock believes this enhanced objective monitoring and assessment could be achieved through the provision of a report to clients, where consultants are required to document the advice provided and include the measurements of the advice were it implemented. Conclusion We appreciate the opportunity to address and comment on the issues raised by the Interim Report and will continue to work with the FCA on any specific issues which may assist in the finalisation of the Market Study