In April 2018, the FCA announced a range of measures to improve fund governance, protect investors and ensure that investors receive value from the investments. One of these measures requires the Board of Authorised Fund Managers (‘AFMs’) to be comprised of a minimum of 2 independent non-executive directors, representing at least 25% of the Board. The deadline for AFMs to comply with the requirement of the policy statement (PS18/8) is approaching fast: 30 September 2019!
NEDonBoard met with the FCA to gain a clear understanding of the policy statement and support NEDonBoard members in positioning them for those roles. In this blog, we outline some of the key points of our meeting with the FCA. Further information has been made available for NEDonBoard members interested in securing a role with an AFM below.
Scope of PS18/8
The requirements set out in PS18/8 apply to authorised fund managers. An AFM is the legal entity that is responsible for all management aspects of a fund. In the UK, investment managers often use an affiliated entity as the AFM. Unlike in Luxembourg or Ireland, there is no Board at the fund level. The Board is at the AFM level, which typically comprises of several funds and fund structures. In other words, a NED is appointed to the Board of the AFM, and not to the Board of the fund.
Objectives of PS18/8
The main objectives of the governance recommendations set out in PS18/8 are to strengthen the duty of AFMs to act in the best interest of their investors and increase the number of independent directors with a minimum of two independent directors, comprising of at least 25% of total Board membership. Historically, the Boards of AFMs have been staffed with executives, which creates conflicts of interests notably when the Board has to assess value for money aspects of the fund management.
The implementation period ends on 30 September 2019. There is still another 6 months for AFMs to appoint NEDs to their boards, but the deadline is approaching fast and not all positions have been filled. NEDonBoard warns that both securing a NED role and finding the right talent for a Board take time.
Skills and experiences required to secure a NED role at AFMs
NEDs need to bring sufficient experience and expertise to fulfil the role. The FCA is clear that no prior financial services experience is compulsory. But to be an effective NED on the Board of AFMs, NEDs will need to demonstrate:
- a solid understanding of the fund management industry and processes,
- an in-depth knowledge of investment strategies and asset classes,
- an appreciation of regulatory rules, directives as well as industry and market trends.
In practice, AFMs that have appointed NEDs following the publication of PS18/8 have favoured NEDs with experience in the asset management industry.
We note that AFM NEDs fall under the Companies Act (like any non-executive director) and are as such required to safeguard the interests of the shareholders. At the same time, the FCA expects the AFM NEDs to balance their obligations to the shareholders with the protection of investor interests. NEDonBoard considers that effective AFM NEDs have great communication and negotiation skills and operate under the highest ethical standards to fulfil their dual obligations, especially if the AFM is an affiliated entity.
Chair of the AFM board
The Chair of AFM boards does not have to be independent. But the Chair of the Board of the AFM falls under the Senior Managers & Certification Regime and as such FCA pre-approval is required prior to his/her appointment. None of the other NEDs have to be FCA pre-approved.
Mandate of the AFM Board
Assessment of value is at the core of the mandate of the NED role defined by the Policy Statement (link to PS18/8: here):
- “AFMs should consider whether the charges taken from a fund are justified in the context of the overall service and value they provide through that fund. This includes both charges that are usually paid directly to third parties and the management fees that AFMs set for themselves. We believe this is particularly important as AFMs are the agents of their investors – they act on their behalf and owe them duties – they are not solely product providers. In CP17/18 we called this a consideration of ‘value for money’ (VfM)”.
Number of roles available
We assessed that the introduction of the Policy Statement has created around 400 to 500 NED roles, a portion of which remains to be filled before the 30 September 2019 deadline.
Written by Elise Perraud, NEDonBoard COO
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