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FCA unveils major overhaul of fund manager governance

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FCA unveils major overhaul of fund manager governance

Investment funds will be required to appoint a minimum of two independent directors to their board in a series of new governance rules proposed by the Financial Conduct Authority (FCA).

The news was revealed in the watchdog's final study into the asset management sector, published today.  

Other changes include the introduction of an all-in-fee to investors and the confirmation of a study into investment platforms.

To help improve the effectiveness of intermediaries, the FCA also recommended that the Treasury considers bringing investment consultants, which advise on £1.7 trillion worth of assets, into the FCA's regulatory catchement.

In the UK, fund governance is typically carried out in-house by a firm’s staff.

This contrasts with the US where the majority of directors are independent and have the power to sack managers if they feel they are not delivering value. 

In its study, the FCA said it found a number of flaws in the UK approach to governance, which can conflict with the best interests of investors. 

'Fund governance bodies, whether in-house or outsourced, tend to lack independence from the fund manager and do not appear to exert effective challenge on value for money,' the FCA said.

'We found that asset management products and services are complicated, objectives may not be clear, fees may not be transparent and investors often do not appear to prioritise value for money effectively.

'They therefore need strong governance to act on their behalf. This does not appear to be happening currently.' 

It added: 'This potentially contributes to the limited price competition for actively managed funds, asset managers being less effective at controlling more complex costs and some funds not clearly communicating their investment strategy to investors. This can also result in investors choosing funds that are less likely to meet their expectations.' 

The FCA has also proposed a series of other measures to address governance, including extending Senior Manager and Certificate Regime to certain fund manager board members, which will apply from 2018.

'We could seek to require that senior managers consider value for money as part of this new regime’s introduction,' the FCA said.

The news was welcomed by PwC partner Amanda Rowland. 'The FCA's use of the Senior Managers Regime to ensure accountability in funds is a welcome move combining current initiatives rather than introducing something new and potentially overlapping,' she commented. 

 

Other proposals include the changing the composition of existing governance bodies to create more independence. This could see existing board structures reformed to have a majority of independent members and an independent chair.

The FCA also suggested the potential creation of an additional separate independence governance body. This would be modelled on the Independent Governance Committees (IGCs) for DC pension funds and would carry out the new duties, leaving the existing fund manager board with its current responsibilities. 

The FCA said an alternative approach could be to hand greater duties to trustees and depositaries.

'An alternative approach would be to leave current [fund manager] governance structures unchanged and impose greater duties on trustees and depositaries to assess whether the fund manager is delivering value for money,' it said.

Will Goodhart, chief executive CFA Society of the UK, was another to applauded the plans, saying the FCA had got it 'absolutely right'.

'There’s been too little independent oversight of the way in which investment vehicles are managed,' Goodhart said. 'Strengthening the governance requirements - dealing with the root cause rather than with the symptoms - will improve client outcomes.'  

The regulator said many respondents supported proposals to improve fund governance, with a large number supporting the FCA clarity on expectations of value for money.

Only a small number of respondents felt that no change was necessary, with some expressing concern over the cost of these new governance structures.    

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