The FCA’s final report into the asset management industry is imminent, so Kevin Tomlin, senior product manager at BNP Paribas Securities Services, talks us through recommendations for robust oversight made during the consultation process.
In November last year the Financial Conduct Authority (FCA) published an interim report and opened an industry consultation into the asset management industry.
The report and consultation focused on three key issues: providing value for money, good fund governance and control over and disclosure of fees, charges and fund objectives. The report also made a number of recommendations, some of which I will look at here.
One of the FCA’s biggest concerns is that the asset management industry offers poor value for money – defined as risk-adjusted net returns. It says this is evidenced by the clustering of charges around 1% and the sectors’ relatively high profits.
The FCA says a factor which contributes to this poor value for money is a lack of robust oversight and suggests this oversight role could be undertaken by one of three entities:
- an independent director,
- an entity separate from the funds’ managing body, such as the trustee/depositary; or,
- in-house – i.e. by the management company
1. Independent directors
The issue of whether or not to require open-ended investment companies (Oeics) to have an independent board – as in the US, or with Luxembourg Sicavs – was considered when Oeics were introduced in 1997. The Treasury and the then regulator, the Financial Services Authority, quickly came to the conclusion that it was impractical to require a thousand plus funds to have independent directors. It was felt the unit trust concept had worked well, so it was simply a case of establishing a corporate version of the unit trust. Hence the minimum requirement is that the Oeic has a single corporate director – the ‘authorised corporate director’.
UK Oeics are not precluded from having a full board, but very few do. However, we have noticed – perhaps partly encouraged by the FCA’s comment on their governance arrangements – that a small number of asset managers are already appointing independent directors.
2. Oversight by a trustee/depositary or other body
Electing a trustee or depositary to provide independent oversight of a fund could be an obvious choice, particularly as they will already be under a duty to oversee various aspects of the manager’s functions.
However, there appears to be little appetite for this within the industry and especially from the trustees, who have different skill sets and are concerned that acting in a capacity of oversight of value for money could lead to them questioning a manager’s investment decisions – thereby creating a conflict of interest.
Another remedy suggested by the FCA was appointing a separate body from the existing management company to oversee value for money. However, industry consensus is that this approach is likely to be disproportionate and costly if mandatory, as other means of demonstrating independent oversight can be bolted onto an existing governance arrangement.
3. In-house
Two pieces of regulation that already address value for money are the FCA’s senior manager regime, which is already in force, and the product governance regime which will come into force as part of MiFID II early next year. Both of these strengthen responsibility and accountability within firms, and so value for money considerations will be required by those who run the funds.
It may be that these two pieces of regulation address the FCA’s concerns, but it is likely the FCA will want a more direct approach to tackling this issue.
Another FCA suggestion is that ‘naming and shaming’ poor performers may increase value for money. This would be a major step for the FCA, given its firm view that past performance is not a guide to the future.
The FCA also recognises that it has at its disposal the means of improving value for money in some areas governed by its rules. In particular, the current rules precluding fund managers from switching investors to cheaper share classes and which impede mergers of funds, are ripe for review.
The report has stirred up healthy debate around the nature of competition in the funds sector and has allowed the asset management industry to explain to the FCA that it does not control distribution or many of the costs it incurs.
When the FCA publishes its final report in the coming weeks we expect its commitment to ensuring a more competitive funds market through improved governance will remain. It seems unlikely it will mandate a single model. It is more likely that asset managers will be required to demonstrate that value for money has been considered and that consideration has involved some form of independent oversight.
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