New FCA regulations governing Authorised Fund Managers (AFMs) come into effect from 30 September.
We examine the new requirements and identify the steps firms should be taking to ensure they’re compliant.
What are the new requirements?
The rules coming into force on 30 September are part of a package of measures introduced as part of the regulator’s Asset Management Market Study.
The full policy statement on the new requirements is available on the FCA website. The rules coming into force this month are detailed in Appendix 1.
The new governance requirements cover two key areas:
- The need for AFMs to review the composition of their boards. From 30 September, all AFMs need to have a minimum of two independent directors on their boards and for independent directors to make up at least 25% of their total board membership.
- The need for AFMs to report annually on the value they provide.
They have been introduced as part of a series of remedies following the Asset Management Market Study, which concluded that there was weak competition in the investment funds sector, and that it was difficult, particularly for less-experienced investors, to identify and choose suitable products that delivered value.
The regulator’s hope is that the requirement for independent directors will deliver better results for investors via improved governance, with independent board members subjecting decisions to greater scrutiny.
The need to publish information on value is designed, similarly, to improve outcomes for investors by making comparisons and understanding of investments easier.
Who do the new rules apply to?
All Authorised Fund Managers (that is, those authorised by the Financial Conduct Authority) will be impacted by the new requirements. The rules apply regardless of the size of funds under management and of the size of the firm itself.
In practice, this means that even the smallest AFM will need a quarter of their board members and at least two of their members to be independent. Even if an AFM has a board or governing body of fewer than eight people, after 30 September, two of those will need to be independent.
What exactly do AFMs need to do?
Looking first at the new rules on boards, fund managers need to:
- Review the current composition of their board – does it have at least 25% independent directors (otherwise known as non-executive directors, or NEDs)? And are at least two of its members NEDs?
- If not, this needs to be addressed. Appoint new directors that address this imbalance. You may want to read more about the ideal mix of perspectives on the board to help with your appointments. Ensuring you use the best process to select and appoint members is also important in developing the right combination of people on your board.
When it comes to the assessment of value, the FCA’s Collective Investment Schemes Handbook (COLL) has been updated to include a specific duty for AFM boards to act in the best interests of investors by making an annual assessment of the value their firm provides.
The AFM must assess, as a minimum:
- The quality of service provided to investors
- Performance, after charges and over an appropriate timescale
- Costs paid by the AFM:
- How the cost of service provision relates to the charges made
- Comparable market rates for the services provided
- Whether investors are benefitting from economies of scale
- How charges made to the investor compare to other services provided by the AFM
- Whether alternative, lower-cost options with substantially similar rights are available to investors in the same fund
This annual assessment of value must be published in the annual fund report or in a separate document. Fund year-ends on or after 30 September 2019 will form the first cohort of results to be reported on in this way.
The link to SM&CR
These new rules are embedded into the SM&CR responsibilities for AFMs. When the Senior Managers and Certification Regime comes into force for all FCA solo-regulated firms on 9 December, it will include specific requirements for a senior manager in every AFM to be responsible for:
- Carrying out the assessment of value
- Recruiting independent directors
- Acting in the best interest of fund investors
Next steps for affected firms
Any AFMs that haven’t yet addressed the balance of exec to non-exec directors need to act now. The deadline for compliance is fast approaching.
And, particularly if you have funds with year-ends approaching soon after 30 September, you need to consider how you will present your assessment of value. Are up-to-date figures easily accessible to those who will be producing the value assessments? Is there a process in place for producing, reviewing/approving and publishing the document?
Ensure that Compliance, Marketing and any other teams that will be involved are aware of the new requirements. Make sure the performance figures and other data are available to ensure inaccurate information doesn’t make its way into your report.
If this all sounds like the final straw on top of your other regulatory demands, explore whether automating some of the production, approval and publishing process could help. Find out more about how automation can help to improve your regulatory compliance.
Nothing in this document should be treated as an authoritative statement of the law. Action should not be taken as a result of this document alone. We make no warranty and accept no responsibility for consequences arising from relying on this document.