It is likely the increased regulatory scrutiny on fund managers’ value could filter down to advice firms in the future
In my last article, I considered the influence a non-executive director could have in challenging an advice firm’s business model in light of the pension transfer issues.
The regulator used the report to reiterate its view that fund managers do not robustly consider the value they offer to investors and that this leads to investor harm.
It concluded they must be held accountable on this and demonstrate their products’ value on an annual basis. That said, it did concede the rules should not focus only on cost but on the fund’s entire value proposition. It will be crucial for firms to consider the process by which they implement this change and the factors relevant to each fund they manage, which may differ between schemes or asset classes.
Fund managers should also consider that the factors applied may differ year on year as the fund changes. The FCA has suggested an implementation date of 30 September 2019.
So what part will the independent directors play in this?
First, let’s look at the rules. The proposal to introduce non-executive directors was generally well supported by the industry, despite some concerns it might be an overly burdensome requirement for start-up or smaller fund managers.
On that point, the FCA has made it clear the benefits of independent scrutiny should be enjoyed by all investors, no matter the size of the business they are investing with. It is also of the view the measure of independence in the formative years of a business is crucial in shaping both strategy and culture.
Fund managers must ensure that at least one quarter of members of the governing body are independent. If the body comprises eight members or fewer, at least two must be independent.
The guidance and requirements on independence are detailed but are set out in the final report. What is clear is that the independent directors should provide input and challenge to the value for money assessment.
The prescribed responsibility for all of this is to be implemented as part of the extension of the Senior Managers and Certification Regime.
Specifically, a senior manager (usually the chair of the board) must take reasonable steps to ensure the firm complies with its obligations to carry out an assessment of overall value, its duty to recruit independent directors and its duty to act in the best interests of fund investors.
The value assessment will require consideration of economies of scale, charges and other payments, the quality of services and the different share classes available to investors.
The FCA has clarified that it will remain up to firms to decide whether to appoint an independent chair.
The FCA’s aim is to strengthen the duty of authorised fund managers to act as “good agents” for their underlying investors. This terminology echoes the comments of the Upper Tribunal in the Arch Financial Products case.
The “good agent” principle is more a regulatory than legal concept and the boundary between legal and regulatory duties here remains to be fully worked out.
The impact of these developments are wide ranging for the asset management industry, particularly in relation to governance and assessment of overall value delivered, which are new areas for fund managers.
New policies, procedures and projects will need to be put in place as soon as possible.
It is worth noting that, while it is asset managers that will need to address the immediate impact of the value for money duty, the FCA’s final rules suggests these obligations may well be extended to other types of firm in the future.
Simon Collins is managing director, regulatory, at Eversheds Sutherland