Lloyds gatekeeper Jonathan ‘JB’ Beckett has warned that being an independent fund director (iNED) will require a considerable amount of technical expertise and those in the role could face personal liabilities if a fund blows up under their watch.
Beckett (pictured), who co-founded the fund manager assessment team at Lloyds, which oversees £180 billion, is leaving the bank later this year. He is planning for a new life as an iNED, when the regime comes into force next year, and focusing more on academia. He is a guest lecturer at Herriot Watt and Stirling universities.
He joined Lloyds in 2010, following stints at Franklin Templeton, Standard Life and Barclays Wealth, and was a Wealth Manager cover star in January 2013.
After a busy few months dealing with Lloyds outsourcing two massive investment mandates to Schroders and BlackRock, we caught up with him to find out what lies ahead.
Why are you leaving Lloyds to go it alone?
‘I’m there until Christmas to ensure a smooth transition, and there are a few things that I’m working on that would be hard for someone else to take over.
‘I felt like I reached a peak with the big strategic work with BlackRock and Schroders, and I thought, “what’s next?” I was part of the due diligence team, and it was a huge undertaking and an intensive period of meetings.
‘In the early stages, we were dealing with around 50 asset managers who put in notes of interest, and we progressed 15 initially.
‘I thought, “what do I want to do for the next 20 years?” More academia and the new rules coming in around fund boards are an opportunity to use my experience, and I hope asset managers agree.’
How much do we know about the final shape of the iNED regime?
‘There are two main things we’ve seen from the Financial Conduct Authority (FCA). One is what independent means in terms of iNEDs. The problem the industry has had in the past has been the appointment of non-execs to get friends into positions or a retirement scheme for ex-fund managers.
‘The FCA is now saying that doesn’t count as independent. You can’t be a shareholder or an ex-consultant for the company. It’s a game changer and will drive a lot of rotation.
‘A lot of these fund boards have the head of distribution, then the directors below them and a token independent, who may have worked there in the past.
‘The other side of this is the assessment of value. We now have seven principles from the FCA, and it’s about the difficult questions that the industry has not wanted to answer. It’s not just about the lowest cost, it’s about adding value for the customer.
‘The second part is much more around lobbying and engaging the wider management group; e.g. why are your trading costs this high? Why are your management fees that expensive? You need to challenge the fund group to minimise those costs and renegotiate their relationships with suppliers.’
Will asset managers really be sacked from funds that they have launched?
‘Does just sacking the fund manager and getting another one solve the problem? It comes with a lot of friction and it’s the investors that lose out in the transition.
‘Is the underperformance due to incompetence? Have they changed the risk profile? Is it just mispriced and if it has not performed as you’d expect, has there been astyle drift?
‘If it’s due to incompetence, then surely the board is well within their rights to change the manager, after a significant period of engagement with the chief investment officer.’
Are the concerns that the same faces will pop up on multiple fund groups’ boards justified?
‘My expectation is to sit on a maximum of two or three boards. I can justify to myself that I will be able to give each of these boards the time they deserve.
‘In Ireland, the boards had to do two days a month minimum, but the industry also translated that as the maximum, and it created a cottage industry of rubber-stamping decisions.
‘Many iNEDs may be walking into this not appreciating the amount of work it will involve. It will really change how fund boards operate.
‘It’s the fund umbrella, and the boards will have to consider whether every fund and share class within that is offering value for money.
You need people with the technical competence and ability to wade through all of that, assessing what they see.
‘These boards will need a minimum of two iNEDs, with 25% of the board needing to be independent, but if you have an incredibly large fund range, it would be lunacy to shrink the board so you just have two iNEDs to cut costs. You will need bigger boards to support bigger fund umbrellas.
What personal liabilities will iNEDs be taking on?
‘iNEDs are within the senior managers and certification regime and will be personally liable in the case of any significant issue. Remember the Arch Crus and KeyDatas? The iNEDs need to understand their personal liabilities.
‘Something, somewhere, will blow up, and if an issue does arise, had you challenged the board?
‘I think you’ll see the professional indemnity insurers responding. If you have an iNED sitting on 20 fund boards, then the liability is potentially massive.’