The FCA Asset Management Market Study (AMMS) was launched in November 2015 with findings reported in April 2018 (PS18/8). The implementation of AMMS by Authorised Fund Managers (AFM’s) is to be achieved by September 30, 2019. It includes ‘a package of remedies to ensure fund managers compete on the value they deliver, and act in the interests of the millions who entrust them with their savings’ according to the regulator.
For the industry, this creates a new menu of rules and guidance covered by this directive. Not only are they widespread, but they bring SMCR into play as well. Here are four key areas which need to be planned for and adequately accommodated:
- a requirement for AFM’s to make an annual assessment of value (the “Value rule”), as part of their duty to act in the best interests of the investors in their funds
- a requirement for AFM’s to appoint a minimum of two independent directors to their boards
- the introduction of a new prescribed responsibility under the Senior Managers and Certification Regime (SMCR) to bring individual focus and accountability
- technical changes to (i) improve fairness around the way in which fund managers profit from investors buying and selling their funds and (ii) facilitate the movement of investors into cheaper share classes
The impact of the above might seem rather like MiFID; just another regulation to comply with but thought through in more detail, it will have a material impact on the industry. The implications will have an impact on executive levels including NEDs and here’s how:
The Chairman of the Board of the AFM (either executive or non executive ‘NED’) will become an SMCR position with the responsibility 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. This last element would, for example, include ensuring the appointed portfolio manager is the right one for the job. Currently these are usually longstanding appointments. This will add weight to the FCA’s requirements on assessing value for money and acting in the best interest of investors, and as a senior individual (the Chairman) will be held accountable.
The question then becomes how the Board and Chairman get the information based on which they can make this assessment. Up until now most AFM Board members are executives of the Management company, with arguably limited external perspective and challenge to how the fund is operated ie a very tunnelled and internal view. These executive Board members might have a perceived knowledge of their company.
A NED has the challenge to get independent understanding of the Asset Management Company and especially these days around the Risk and Control Management Framework, not just the fund strategy(ies), its performance and value for money. Hence which reports will the NED be provided with to ensure him/herself of the sustainability of performance and value for money?
The UK industry manages £7 trillion in assets and firms offering products with particularly poor value for money may struggle to justify their offering and be put under pressure to reduce fees, improve the quality of service, or move investors into better value share classes.
Equally, with no exemptions for the smaller players in the industry, this could even lead to closure of funds due to the additional cost for NED’s, providing of information and other associated admin. Over all, the industry will be a need to upgrade even further the Risk and Control Management Framework to ensure the Board’s working and for the Chairman to be able to sign off his/her SMCR duties.
Being a NED in this environment of changed responsibility, greater emphasis on further investor protection and likely still being surrounded by a majority of executive members on the Board, will be challenging.
Hopefully the new cooks in the kitchen will have the challenge to make existing cooks realise that the taste of the consumer has changed and therefore the meal needs to be cooked differently.