Authorised corporate directors (ACDs) have come under intense scrutiny in the last couple of years following the collapse of the Woodford Equity Income fund in 2019 and the shortcomings of its ACD, Link Fund Solutions, calling into question the viability of the market and its operations.
After Neil Woodford’s (pictured) equity fund, thought to have been worth £10bn at its peak, collapsed in 2019, the FCA published a delayed report into the failings of ACDs, concluding fund administrators lacked understanding of the funds they oversaw, had poor due diligence processes and failed to properly control conflicts of interest.
Link Fund Solutions is currently facing a £50m fine over its failures to manage the liquidity of Woodford’s fund. The FCA also demanded £206m in redress payments be set aside by parent firm Link Group before it would greenlight a takeover by Dye & Durham – but that deal has since fallen through.
The FCA has itself been criticised for its supervision of Link Fund Solutions during the Woodford collapse.
The ACD has faced various legal challenges because of the collapse, the latest of which was a joint £10m suit filed by law firms Leigh Day and Harcus Parker in June on behalf of over 3,000 investors. Link has always maintained it acted within the rules.
According to Bella Caridade-Ferreira, the ACD system is “in dire need of an overhaul”.
“Some—most—third-party ACDs take on the role of ACD but do not ensure that the fund is properly managed by the investment manager and in the best interests of the investors,” she says. “The problem is that the ACD is paid for by the investment manager, so it’s unlikely to bite the hand that feeds it.”
Caridade-Ferreira continues: “The fees ACDs receive also do little to incentivise them to do anything more than basic cursory checks – if that. The checks and balances do not work. It’s about time they were held to higher standards and demonstrated value for money.”
See also: Shrivelling valuations make grim reading for trapped Woodford investors
‘Reviewed and made more responsible’
Stewart Alexander, director at Gemini Capital, offers a different perspective, stating instead that the market needs to be “reviewed and made more responsible for their actions, or more importantly, their in-actions”.
“The ACD plays a vital role in ensuring that a fund is managed as per the prospectus, the document that an investor has ‘read’ before investing. In reality, they are there to protect investors and to represent their interests when dealing with the investment manager. They must ensure that all the counterparties in the management of the fund are doing their job properly,” he says.
On whether ACDs had a bigger role to play in terms of enforcing rules on fund managers and, in turn, on strengthening governance standards, Alexander says: “Absolutely. ACDs should continually challenge all aspects of the fund management chain to ensure compliance with investors’ expectations as per the documentation […], it is our job to ensure the fund is run as set out in the fund’s documentation and to challenge when a manager fails to adhere to these workings.”
He adds: “An ACD should intervene before anything that can compromise the fund or put investors investment at risk.”
According to Ben Yearsley, director at Fairview Investing, ACDs are meant to act as an independent check to ensure fund managers are “doing what they say they will”. “Clearly, there have been questions about the role of them recently, with certain funds, and whether the ACD carried out that role diligently enough.”
See also: FCA silence adds insult to injury as Woodford scandal hits three-year mark
Squeeze
With the asset management value chain going through a margin squeeze, ACDs could be under greater pressure to prove their worth.
“The squeeze on margins has been driven by the global regulators and the FCA has been a champion in this regard. However, technology hasn’t always been there to drive down costs, although we are now seeing dramatic acceleration with innovations in AML, client onboarding and compliance monitoring over the last couple of years,” says Alexander, explaining that “the race to the bottom” on fees could create some shortcuts if it is not monitored and it should be remembered that “cheapest doesn’t mean it’s the best”.
“In fact, far from it. ACDs are actually underpaid for the risks and responsibilities they have to undertake, but many don’t see that,” adds Alexander. “The market should realign itself with the reality we see today. Value is seen in everything but worth is rarely appreciated.”
Yearsley comments that he thought the ACD business felt “pretty low margin” when one factored in monetary risk.
“I thought the rules were pretty clear about roles and responsibilities of the ACD and clearly with recent news the FCA agrees. The ACD is there to ensure a fund is invested properly and has sufficient liquidity. […] Margins are being squeezed all over the place and it feels a pretty low margin business compared to the risk of fines and compensation. It’s a bit like low margin platforms – lots of risk for small amounts of return,” he says.
