The FCA estimates that over three quarters of the UK population are exposed to the asset management sector either directly, or via their pensions. The FCA states that some investors can be relatively insensitive to the price of asset management services and that such investors struggle to protect their own interests. To help mitigate this the FCA specified remedies that seek to address both demand and supply side problems in the asset management market with an aim to lead to greater competition and innovation in the asset management market in the interests of the consumers it serves. As a result, changes are afoot for the asset management industry in the UK based on the FCA’s consultation paper (June 2017) on implementing asset management market study (“AMMS”) remedies and the resultant feedback and final rules (published April 2018). There are three main areas of change that an independent director of Authorised Fund Managers (“AFMs”) should be aware of.
Increased focus on the role of independent directors
Annual assessment of value
Disclosure of costs
Increased Focus on the role of independent directors
Particular focus has been placed by the FCA on Authorised Fund Managers (“AFMs”) governance remedies. Of interest is the FCA’s approach to independence on the boards. A minimum number of independent directors has been noted, however, the FCA has not indicated that they will have any concern with regards to the other commitments of the independent board members external to the AFM, the important thing for the FCA is that the independent director has no prior relationship with the AFM. Whether the chair is an independent director or not has been left to the firm to decide.
Annual assessments of value
Going forward from the 30th September 2019 non-executive directors are required to conduct an annual assessment of value, which will be published in fund prospectuses, this further increases the importance of having independent non-executive directors on the boards of AFMs. In addition to disclosing costs, the AFM director’s should also be assessing if the AFM is providing value. Initially the FCA proposed that AFMs assess the value for money (“VfM”) of each fund against a non-exhaustive list of prescribed elements, conclude that each fund offers good VfM or take corrective action if it does not, and explain the assessment annually in a report made available to the public. After public consultation the FCA have somewhat altered that position and final guidelines are that fund charges should be assessed in the context of the overall value delivered, rather than using the term ‘value for money’.
Disclosure of costs
Obviously understanding costs is important for consumers and the FCA’s asset management market study highlighted the importance of clear disclosure of what asset management services (“AMMS”) cost through the presentation of a ‘single charge’. Subsequent to the AMMS both the Markets in Financial Instruments Directive (MiFID II) and the Packaged Retail and Insurance based Investment Products Regulation (PRIIPs) have introduced greater disclosure of all costs and charges, including transaction costs. As a result consumers should now see the full costs and charges, expressed as a single fee, for most transactions in investment products, and on an ongoing basis. The FCA further conducted behavioural studies on cost and charge disclosures and published the results in an April 2018 occasional paper which they state firms should consider when thinking about how their disclosures are working. This is an important point for those non executive independent directors who are responsible for signing off on the disclosures at board level.
Non executive independent directors should also note that box profits or when the managers of dual-priced authorised funds make a risk free profit when dealing as principal in the units of their funds are now to be repaid to the fund, for the benefit of investors. The FCA have allowed some flexibility in how risk-free profits are to be allocated fairly and in the interests of investors. The rules on box profits came into effect on 1 April 2019.
It will be interesting to watch how the extended role of the board of directors in relation to AFMs impacts the number of board positions non executive directors will take on fund boards and how this increased FCA focus on governance will impact the manager’s cost structures. For the non-executive independent directors’ requirement the related cost may pass through the fund managers to the funds and ultimately investors and may not be directly charged to the funds. As a result non-executive directors will be a cost of the manager, who will then have discretion to decide whether to pass it on to investors via an increase of the management fee or any other fees or not. It also means that the manager will be focused on the value add that the independent directors bring to their funds to ensure that the manager is also receiving value for money from the services rendered by the independent directors. Only time will tell whether fund managers will bear the cost of the independent directors or pass those to the end investors.