Fund managers will be required to have two independent directors, comprising at least 25 per cent of the total board membership under the new rules. Responding to a consultation on new rules prompted by its Asset Management Market Study, the regulator brushed aside concerns that independent directors would be costly and uneconomic for smaller investment managers.
The FCA says this new requirement is needed because asset managers are the agents of the investors in their funds and not just product providers. The regulator says it has found that asset managers generally do not consider robustly whether they are delivering VfM, despite their existing obligations.
A feedback statement says: “We accept that our draft rules could be seen as too focused on AFMs’ costs rather than the full value proposition of funds, which was not our intention. We have redrafted our final rules to clarify that fund charges should be assessed in the context of the overall value delivered, rather than using the term ‘value for money’. We have also decided to extend the implementation period for this requirement from 12 to 18 months.”
The regulator will bring in a new Prescribed Responsibility for asset managers’ senior manager, usually the chair of the board, to take reasonable steps to ensure that the firm complies with its obligation to carry out the assessment of value, the duty to recruit independent directors, and the duty to act in the best interests of fund investors. It will publish final rules for this later this year.
Asset managers will also be able to move customers into cheaper share classes without their consent. To do so they can make a one-off notification to investors, which does not require a response, a minimum of 60 days before a mandatory conversion.
The FCA is still considering the evidence on whether it should ban trail commission.
Asset managers will be stopped from making a risk-free profit from dual-priced authorised funds. Instead they will be required to repay these profits into the funds.
The FCA is not extending this guidance to pensions, and will consider whether to extend it to with-profits arrangements later this year.
Transparency Task Force founding chair Andy Agathangelou says: “The FCA have done a good job, not only in terms of the remedies but also in the way they have engaged extensively with industry throughout the entire process. They have signalled all along what their general direction of travel was likely to be and the net result is that they have managed expectations very well – few observers will be very surprised by what has been announced today, and that’s good for the sector as a whole.
“What now needs to happen is that these positive developments must be adapted and adopted globally, because the problems they tackle are truly international in nature. To my mind, the FCA’s Asset Management Market Study will be looked upon by Regulators around the world as an excellent way forward. For other regulators to follow suit they will first need to need to embrace a competition and market efficiency remit just like the FCA has done. I think I’m right in stating that only the UK’s FCA and the Maltese Financial Regulator have properly embraced a competition remit. It’s no longer good enough to regulate through a binary rule book because the less enlightened parts of the industry have become too adept at bobbing and weaving around, over and under the regs.
“In terms of specifics, I particularly like the requirement for greater accountability for senior decision-makers because I’m a firm believer in the idea that ‘accountability cures,’ especially when it’s aimed at people at the top of key market participants, because they are the cultural architects of the industry as a whole. Leaders need to lead in a consistently client-centric way and the accountability remedy will help significantly. Once they are properly ‘on-side’ with reforming towards a more consistently client-centric culture, right across the sector, it will be much easier for the industry’s trade bodies to provide the progressive leadership that is so desperately needed. Culture is key and it is crystal clear the FCA fully understand that.
“I also like the way the FCA have given themselves licence to tighten the noose in key areas if they need to. A good example is the way the independent directors role is going to be played out; the FCA have the capacity to raise the bar as and when they need to, and that’s an intelligent approach. Similarly, the value statements regime when it comes into effect is going to open up a treasure chest of opportunity for the FCA to ratchet up standards; by doing so they will be harnessing the transformational power of transparency to very good effect. My overall criticism is that it’s all taking so long, but given the choice of regulating quickly or regulating properly I’d rather the latter.”
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“What I like most about the FCA’s announcements today are that there are no real surprises. The FCA have done a good job, not only in terms of the remedies but also in the way they have engaged extensively with industry throughout the entire process. They have signalled all along what their general direction of travel was likely to be and the net result is that they have managed expectations very well – few observers will be very surprised by what has been announced today, and that’s good for the sector as a whole.
What now needs to happen is that these positive developments must be adapted and adopted globally, because the problems they tackle are truly international in nature. To my mind, the FCA’s Asset Management Market Study will be looked upon by Regulators around the world as an excellent way forward. For other Regulators to follow suit they will first need to need to embrace a competition and market efficiency remit just like the FCA has done. I think I’m right in stating that only the UK’s FCA and the Maltese Financial Regulator have properly embraced a competition remit. It’s no longer good enough to regulate through a binary rule book because the less enlightened parts of the industry have become too adept at bobbing and weaving around, over and under the regs. Moving forward, the over-riding question needs to be ‘What needs to happen for the industry as a whole to provide the greatest chance of the best possible outcomes for investors through a healthy, competitive and transparent market?’ That’s the kind of approach that is most likely to restore trust and confidence in the sector globally.
In terms of specifics, I particularly like the requirement for greater accountability for senior decision-makers because I’m a firm believer in the idea that ‘accountability cures,’ especially when it’s aimed at people at the top of key market participants, because they are the cultural architects of the industry as a whole. Leaders need to lead in a consistently client-centric way and the accountability remedy will help significantly. Once they are properly ‘on-side’ with reforming towards a more consistently client-centric culture, right across the sector, it will be much easier for the industry’s trade bodies to provide the progressive leadership that is so desperately needed. Culture is key and it is crystal clear the FCA fully understand that.
I also like the way the FCA have given themselves licence to tighten the noose in key areas if they need to. A good example is the way the Independent Directors role is going to be played out; the FCA have the capacity to raise the bar as and when they need to, and that’s an intelligent approach. Similarly, the value statements regime when it comes into effect is going to open up a treasure chest of opportunity for the FCA to ratchet up standards; by doing so they will be harnessing the transformational power of transparency to very good effect. My overall criticism is that it’s all taking so long, but given the choice of regulating quickly or regulating properly I’d rather the latter.”