FCA Asset Management Market Study: Governance to drive value?
01 February 2017
While we believe that asset managers act as a ‘good agent’, mitigating conflicts of interests and contributing to better outcomes for investors, the interim results of the Financial Conduct Authority’s (FCA) asset management market study may tell a different story for some.
The main finding – of limited price competition – has been addressed by the regulator through a variety of potential remedies. Permeating many of these is the theme of governance. Given the difficulty many retail investors face in understanding complex products and assessing value, the FCA’s view is that current governance processes do not substitute for this in considering value for money and it has therefore proposed a variety of solutions.
The most radical approach would introduce a fiduciary duty on asset managers by statute. A statutory obligation on asset managers to act in the best interests of investors would result in a significant change to the way firms operate on a legal basis. The other approach is to rely on regulatory reform with the FCA proposing six different remedies.
The FCA could maintain existing governance structures but clarify the duties of the boards of management companies. If this does provide clarity around the specific duties expected of fund governance bodies in assessing value for money, we would welcome it. But ambiguity around what the regulator considers to constitute value for money for investors could cause difficulties. How would you evidence the practical steps taken to demonstrate how you have acted in investors’ best interests?
The FCA also proposes increasing the scope of the Senior Managers and Certification Regime (SM&CR) to management company board members. With the regime currently due to be applied to asset managers by 2018, the FCA could prescribe a responsibility to specifically consider value for money for investors. The aim of the SM&CR is to increase the individual accountability of senior management. For the individual board member – or, if deemed particularly important like the ring-fencing responsibility in the banking world, all board members - prescribed the responsibility for ensuring value for money for the investor, this will be a worry. Delivering value for money depends on factors which may not be directly under their control and relies on information being provided from other parties, such as details of transaction costs.
Three of the proposed remedies modify existing governance structures by bolstering independent input, which is an extension of the FCA’s approach to corporate governance more broadly. The FCA has long pushed for independent non-executive directors (iNEDs) on boards to provide an independent view to challenge the executive, improve the quality of debate and enhance the board's overall effectiveness. The UK Corporate Governance Code also requires an independent board Chair and iNEDs and our clients have moved to adopt these board structures in recent years.
Other jurisdictions already have iNED involvement in fund governance, notably Ireland, Luxembourg and the US. The effectiveness of independent governance depends on both the quality and capacity of the iNEDs. With a limited pool of iNEDs – and with SM&CR potentially increasing the risk profile of all senior staff - there could be a limited pool of appropriate iNEDs available. To ensure quality, firms must aim for greater board diversity, carefully considering the skillsets and backgrounds likely to drive value for money for investors. The Central Bank of Ireland has tried to address capacity issues by publishing clear expectations on fund directors' commitments so that they are able to provide the required time and effort to the role.
The use of iNEDs is not a panacea. We have seen independent boards of investment trusts forcing a change of investment manager as a result of poor performance, but we have also seen examples of poorly designed performance fees overseen and agreed by independent investment trust boards.
Each of the remedies taken alone is unlikely to act as a cure to ensure value for money for investors in all circumstances. But we think it is important that the range and breadth of options is considered. It is now for the industry to reflect on whether the proposed regulatory reform can drive change to ensure value for money for investors and importantly what type of reform is best suited to do that, or whether a statutory duty is required to force change.
For our Asset Management market study interim report blog series visit: http://pwc.blogs.com/fsr