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Compound Growth

Fund Managers to appoint additional NEDs by September

1st April 2019

Fund Managers must have a Minimum of Two NEDs

Following the Asset Management Market Study that was published by the FCA in June 2017, Fund Managers must ensure they are compliant with new regulatory requirements by 30th September 2019.

The FCA concluded in their Asset Management Market Study that there was an imbalance on the board of must fund managers. Invariably it was found that most boards were made up exclusively of executives of the firm, which then put into question whether the best interests of investors were being served.

To help redress this imbalance within Fund Management Firms, the FCA proposed a set of remedies and, after consultation, the finalised set of remedies was published by the FCA in Policy Statement PS18/8 in April last year.

PS18/8 requires all Authorised Fund Managers (AFMs) to assess whether their offerings are in line with their need to act in the best interest of investors. In addition, the FCA will require AFMs to appoint a minimum of two independent directors to their boards and for independent directors to comprise of at least 25% of the total board membership. The thought behind having more independent persons on the boards of fund managers is that it will better serve the interests of investors since decisions will be subject to greater scrutiny and challenge.

Whilst the FCA had thought about whether the Chair of the Board of AFMs should be an independent director, they have decided to leave this for the AFM to determine themselves since there are good reasons to choose either option.

The deadline for complying with the FCA’s new governance requirements is 30th September 2019.

• April 2018: Policy Statement (PS18/8) that outlines the FCA’s first set of remedies to the market study findings, as consulted upon in Consultation Paper CP17/18.
• June 2017: Final Report on the Asset Management Market Study (MS15/2.3)

Which Fund Managers will be affected?

All Authorised Fund Managers will be affected by the FCA’s remedies since the new governance requirements affect all AFMs, no matter the size of their assets under management.

Since there is no AFM size limitation before the new rules apply, this means that even the smallest AFM will need to appoint 25% and a minimum of 2 independent directors to their boards. Thus, if an AFM’s governing body comprises of fewer than eight members, the AFM must still ensure that two of their members are independent.

Whilst the regulator has estimated that their remedial requirements will mean the sector has to appoint a further 480 independent non-executive directors (NEDs), many others are speculating that the number of NEDs required might be higher.

Who can be appointed?

However, the good news for AFMs looking for suitable NEDS is that there are many individuals qualified to take on the position of independent director, and there is no limit on the number of AFM boards an independent director may serve upon.

Of course, suitable individuals will need to have enough experience and expertise to fulfil the role, however is seems that financial services expertise is not compulsory – though it most cases would surely be beneficial.

The few limitations in place for the appointment of NEDs is that they:

• Can serve no more than 10 years at once;
• May not be eligible for appointment to the same AFM until five year have passed from the end of their last term;
• Are not to have been paid by the AFM group for five years prior to appointment; and
• Not to have had a material business relationship with the AFM for three years prior.

With the FCA’s deadline (30 September 2019) for appointing additional independent directors coming ever closer, fund managers would do well to ensure they are ready well in advance, and in particular with the deadline for the extension of the Senior Managers & Certification Regime (SM&CR) deadline also looming (December 2019).

It should also be noted that as part of the extension of SM&CR, the FCA has introduced a specific prescribed responsibility for AFMs, in that a senior manager (usually the Chair of the board of an AFM), must take reasonable steps to ensure that the firm complies with its obligations and duties to:

• carry out the assessment of value;
• to recruit independent directors: and
• to act in the best interest of fund investors.

Help for AFMs looking to Appoint Independent Directors

Should your firm be looking for candidates to fulfil an independent director role, Compound Growth would be happy to assist. We have a number of senior consultants that would be happy to take on a non-executive director role and which may suit your requirements. Please get in touch with our friendly support team who would be happy to help.

Read our latest articles, news and views affecting compliance and regulation in the UK Financial Services Industry.