The Financial Conduct Authority's (FCA) proposed major overhaul of fund governance will create extra compliance work for fund firms.
The watchdog outlined the wide range of governance proposals it was consulting on in its final asset management study released today. These included the appointment of at least two independent directors to sit on fund boards.
In its consultation paper, the FCA said 'introducing a greater degree of independence to the relevant decision making bodies to rebalance competing interests'.
In essence, the FCA wants fund firms to ensure ongoing value for money for unitholders in each relevant fund it runs.
To meet its set of demands, the FCA estimates that each fund firm will 'incur five "person days" of compliance staff work.
It expects this sort of compliance work - which includes delivering regular reports - will cost £363,64 per person per day.
On top of this it estimates that each fund manager will incur two working days (16 hours) of external legal advice at an estimated average cost per hour of £500.
'We assume that AFMs will incur ongoing costs in terms of the time that executive directors will take to prepare for and participate in annual board discussions on value for money, and also in the costs they will incur in compliance /support staff time to help,' the FCA added.
Overall it envisages each AFM incurring an average one-off cost of £9,800. Taken across the 192 fund firms it authorises, this equates to a combined £1.9 million in one-off costs.
It will result in higher ongoing costs, however.
The FCA said: 'The sum of the £813,000 per year ongoing costs associated with the requirement for the AFM to assess value for money and the £26.9 million per year ongoing costs associated with the cost of the independent directors, which we expect AFMs to pass through to fund investors via increased fees or charges.'
The watchdog believes the introduction of an explicit independent element on fund boards removes the 'ambiguity' around its expectations and will ultimately lead to better deal for investors.
'We believe that the introduction of independent members to AFM boards will provide an independent view and challenge to the deliberations of the board,' the regulator said.
'This will help to reduce the tension between the competing interests of the investors and the interests of the AFM’s shareholders that are likely to arise as part of assessing value for money.'
Will Goodhart, chief executive of the CFA Society of the UK, applauded the proposals, saying the FCA had got it 'absolutely right'.
'There’s been too little independent oversight of the way in which investment vehicles are managed,' he said.
'Strengthening the governance requirements - dealing with the root cause rather than with the symptoms - will improve client outcomes.'