The Financial Conduct Authority (FCA) is set to require the appointment of two independent board directors as part of the implementation of the asset management review amid concerns about fund firms not offering value for money.
The directors can’t have worked for the asset management firm in the last five years, in order to be considered independent.
The move was confirmed in a policy statement published in April, snappily titled ‘PS18/8: Implementing asset management market study remedies and changes to our Handbook – feedback to CP17/18 and final rules’.
Time pressure
Firms are expected to appoint these directors in the next 18 months – a concession on the original 12 months – so they must be in place by 30 September 2019 and comprise at least 25% of the board.
The paper gives quite a lot of guidance and some insight into the FCA’s thought processes to date.
For example, there were calls to exempt new firms, but the regulator has rejected this saying: “We believe that the cost is justified even in the early years of start-up AFMs, as independent directors’ perspectives are particularly important in a firm’s formative years during which its strategy and culture are set.”
No board limits
Arguably one of the more controversial measures is that the FCA hasn’t restricted the number of boards a person can sit on, leaving it up to the individuals concerned. It has also decided against requiring that the chair is one of those independent directors though it adds that it sees some benefits to this.
There are strictures about existing relationships with the firm. The term limit is 10 years maximum and directors cannot have worked for the firm in the last five years or have had a material business relationship in the last three years.
In addition, despite some calls for it, these directors do not have to be existing financial services professionals. Indeed, this is specifically set out in the rules which state: “The expertise and experience required under may have been gained through professional experience, public service, academia or otherwise, and does not need to relate to the financial services industry.”
Skills gap
But will firms struggle to find people?
Financial Inclusion Centre director Mick McAteer, and a former non-exec at the FCA, also believes that the capacity issue may have been overstated.
“There is a very good body of independent people out there – whether it is ex-consumer reps or even ex-regulators who can fill the independent role. There is a concern that in financial centres such as Dublin and Luxembourg, you get people with multiple directorships, but that is because they have a tendency to go to the usual suspects.
“There is plenty of opportunity to broaden out the base of these directorships here in the UK. This is all about representing the interests of the unit holders.”
Square Mile Investment Consulting and Research managing director Richard Romer-Lee says: “It is a good idea that independence is being introduced. There are plenty of people who are capable of fulfilling these roles and the people on the boards do not need to come from the industry. This is an opportunity for boards to introduce other skill sets by bringing people in from outside. Where are they going to find them? I suspect from all walks of life.”
McAteer suggests that it may be a case of seeking one director who can grasp the technical issues such as concerns about box pricing while another would have a consumer background or background from another sector.
Indeed Romer-Lee broadly agrees with that assessment. “What I have heard from some of the people who are thinking about who they should recruit, is that they may seek one person can bring the informed challenge, and another a very different perspective,” he says.
Graham Bentley, managing director at investment marketing consultancy gbi2 does see some constraints. He says: “One could argue they’ll be looking for industry experience particularly at senior levels. However the candidates are not allowed to have recently had employment or a commercial relationship with the firm. This is a constraint on those of us whose clients are more likely to be asset managers. Of course there are more than 200 Investment Association member companies.”
Board diversity
Asset managers will be under pressure to ensure boards are diverse, by gender, race or otherwise.
Bentley says: “I know a number of companies who are reflecting on that combination of characteristics, looking therefore to recruit individuals who have had very senior roles outside the industry. Given those in public service can retire early – for example from the police and the NHS – there will be a richer well from which to draw water than simply ‘investment types’.
“These individuals are also more likely to understand customer concerns, and support companies’ need to satisfy the regulator’s expectation that value for money can be challenged at board level.”
Romer-Lee does seem some issues with directors serving on more than one board. He says: “I do think leaving it the director to say whether they can serve on more than one is interesting. There may be worries about confidentiality and so forth because your duty should be to that board.”
But he also wants asset managers to be imaginative.
“You can be imaginative and bring on people who understand about consumers, or distribution or technology or regulation or legal. There are all sorts of skills you can bring in. Everyone is going to be all over this. It is a great opportunity for asset managers to get the construction of those boards as good as possible.”
