What Role for Fund Governance In The UK

What Role for Fund Governance In The UK? Date: October 11, 2023 Presented by: Roger M Barker (Institute Of Directors Iris H-Y Chiu, University College London) Introduction of Mandatory Independent Directors for Fund Monitoring FCA introduced this after Asset Management Market Study which concluded in 2017 Key findings include a need for fund managers to better scrutinize cost and fees of funds for each fund they manage and introduction of 'Value for Money' assessment obligation on yearly basis At least a quarter independent director to be appointed to the authorized fund manager, principally to provide input and challenge to the 'VFM' assessment. 'Independent fund directors' are tasked to act as a monitoring mechanism 'from the inside to ensure the robustness of 'VFM' assessments. Nature Of Independent Fund Directors' Role - Relatively narrow monitoring mandate for independent fund directors - Against the backdrop of fund regulation by the FCA Extensive regulation for UCITS sourced from harmonized European legislation since 1985 for the aspects. of portfolio governance, prudential management and investor relations. UCITs standards informed the FCA's regulation for other retail collective investment funds NURS. Regulatory framework also includes other monitoring mechanisms at different points of fund operations. For examples: permanent compliance function, independent risk management function, depositaries, independent valuers, serving as checks and monitors for specific risks to investor protection. FCA's Findings Regarding VFM Reforms And Independent Fund Directors 2021 1. Earlier this year, the FCA carried out a survey of 18 fund managers in order to ascertain how the VFM assessment is being carried out. and what roles independent directors play. 2. On the whole the regulator found good and poor practices and overall room for improvement by the fund management industry. 3. In particular, the regulator's 7 guidelines for VFM assessments were not robustly carried out in areas of poor practice and some independent fund directors we criticized to be unaware of their roles, failing to provide input and challenge and to ask 'difficult questions or being overly aggressive in their monitoring roles. Critical Reflections On The FCA's Expectations - How independent fund directors work as part of the mosaic of monitoring mechanisms - Comparing with the US which relies on independent fund directors extensively - What should regulatory expectations be of independent fund directors in the UK? Narrow Mandate For Independent Fund Directors The narrow mandate places independent fund directors within the mosaic of monitoring mechanisms, hence improvement to their roles should be task-focused. In this manner, should focus be on 'independence' as in the US, rather than task competence? VFM complexities require recruitment of highly financially literate independent directors and it should be considered if the FCA should make this explicit. Consider requiring Value Committees on management company boards including independent fund directors, head of compliance and relevant executive directors to lead on VFM assessment? Specific training or certification of independent fund directors The Monitoring Role Of The Independent Fund Directors- Further Thinking - Does the FCA expect more general monitoring from independent fund directors, as in the US? - There is potential for such a monitoring role to expand and contribute to fun governance in the face of new issues that funds face - Independent fund directors benefit from having high level oversight and seniority - But moving away from narrow framing means new forms of regulatory support may be needed - New areas of challenge for fund governance  Liquidity management Regulation of sustainable investment Internal monitoring mechanism like independent fund directors benefits from proximity to fund developments and information, therefore allowing early steps to be taken to protect investors But it is also arguable that lack of micro-level oversight of portfolio composition information Systemic implications of redemption runs would likely attract more prescriptive forms of regulation by regulators to meet public interest needs. - Regulation of sustainable investment EU has developed new obligations for investment funds to integrate sustainability across portfolio management and specific obligations for marketing and accounting for the sales of sustainably- labelled investments. UK likely to develop new TCFD-based disclosure obligations for all investment funds. Is the compliance function better placed? Is there a role for senior level monitoring against greenwashing or risks posed to investors? Conclusions  Policy choice for regulator in relation to fund monitoring by independent fund directors.  The regulator needs to better articulate regulatory expectations for independent fund directors bearing in mind their place in the mosaic of monitoring mechanisms.  A narrow mandate approach entails rather different regulatory expectations than currently articulated, as regulatory support should be more clearly framed for task competence in VFM assessments.  The wider potential of independent fund directors as monitoring mechanism entails different regulatory articulation and support.