New rules from the FCA require fund groups to appoint at least two independent directors to their boards in an attempt to enhance transparency in governance and ensure investors’ interests are known and supported.
This is a huge step forward for fund groups. More and more often they have to deal with unit holders at arm’s length, with clients investing via advisers and platforms. This makes it difficult to get to know them at all.
Yet, at the same time, such groups are held increasingly accountable for outcomes by the regulator.
The independent directors will supply meaningful insight and challenge to fund group boards to ensure investors’ interests are looked after.
It is estimated there will need to be around 500 of these individuals, who must be able to demonstrate a lack of conflict of interest, an intellectual robustness and a detailed knowledge of investor and fund group dynamics to fulfil their roles.
I have heard this number disputed in some quarters but it sounds about right when you consider the sheer amount of asset managers and funds open to investors, either directly, through platforms or via an adviser.
While fund groups will no doubt know lots of talent from which these people could be drawn, it may be much more difficult than it first looks.
This is a very large number of industry-savvy individuals to find quickly. They will have to carry board-level responsibilities and demonstrate a willingness to speak up for the investor even if it might, at times, be unpopular or commercially unattractive, and often among other strongly opinionated and knowledgeable executive directors.
Existing staff will struggle with the necessary lack of conflict of interest, as will many highly respected advisers and fund selectors. But it is just these types that will have the breadth of experience and detailed knowledge needed for the role.
Professional non-executive directors, public servants and compliance consultants may be able to contribute but it is very difficult to quickly and effectively amass the end investor knowledge required, let alone how it may intersect and impact upon the decisions groups make daily as they conceptualise, build and market funds.
The regulator has suggested that independent directors seen to amass too many roles could be frowned upon and lead to fund groups being criticised for going through the motions. This makes the 500 figure even more plausible.
Like many elements of regulation aimed at protecting the public, we should applaud the concept. But I do not envy those who will have to implement it. Just how many un-conflicted, highly experienced financial services sector individuals are there that would pass the scrutiny of the regulator, advice community and investing public?
I am not sure where they will come from but I do hope fund groups are successful in finding them. This is a welcome move in the right direction and could close the knowledge gap between investors, their advisers and those who build the funds.
Lee Robertson is chief executive of Investment Quorum