17 May 2018

FCA introduces new governance requirements for authorised fund managers

In April, the FCA published Policy Statement 18/8 which introduces new requirements for UK authorised fund managers (‘AFM’) in respect of their management of authorised funds in a bid to “improve competition in the asset management industry.” The rule changes to be transposed into the Collective Investment Schemes sourcebook (COLL) will become effective from April 2019.  This is part of the FCA’s Asset Management Market Study that is an ongoing and long term project for the identification of any issues and solutions in the asset management industry.

Asset Management Market Study key findings

The market study published by the FCA includes final findings and proposes remedies that are designed to address the concerns identified. As the study was conducted in close consultation with market participants, the final results closely match the key findings set out in the interim reports and are unlikely to come as a shock. The key findings include:

• price competition is weak (many businesses showed sustained high profits over a number of years);
• investors are not always clear what the objectives of funds are; and
• concerns around the way the investment consultant market operates.

Policy changes

While the findings might not cause a huge stir, and affect managers of authorised funds only, the rule changes mark a divergence from the current regime. Most notably, the study introduces a new requirement for at least 25% of the board of an AFM to be made up of independent directors (with a minimum of two independent directors). This demonstrates a move to more closely match the current regime in the US whereby the majority of directors are independent. Other key policy changes emanating from the study include:

• a requirement for AFMs to assess annually whether the charges taken from a fund are justified in the context of the overall value provided by the fund;
• the introduction of a new prescribed responsibility for AFMs which will take effect alongside the wider extension of the Senior Managers and Certification Regime;
• new rules to prevent AFMs retaining risk-free box profits; and
• revised guidance to make it easier for AFMs to convert investors to cheaper share classes where this is in their interests.

Although the changes are only coming into effect in April 2019 and only affect AFMs, all asset managers should consider these changes, as similar measures are likely to be extended more broadly in the future for full harmonisation of the standards applicable in the asset management industry.

How we can help

Our team has a wealth of experience helping asset management clients thrive in this rapidly changing industry. Our sector specialists can help you implement regulatory requirements and establish good governance frameworks, processes and procedures. We can provide the support and guidance clients need to deal with these new risks and opportunities.

For more information, or if you would like to discuss how the new rules will affect your business, please contact Gareth Magee.