Following a year-long consultation process on its Asset Management Market Study, the FCA has released its first proposal of changes — which are set to have a significant and far-reaching impact on the asset management sector.
What has the FCA proposed?
The FCA has proposed that, by September 2019, asset managers should appoint a minimum of two independent directors to their board (regardless of the size of the firm) to balance the interests of shareholders and investors appropriately. These independent directors should comprise at least 25% of the total board membership.
Additionally, the FCA’s Senior Managers Regime (SMR) is being extended to asset managers in 2018–2019, bringing with it new prescribed responsibilities for executives and the board. These include:
- Assessing value for money;
- Ensuring independent directors are appointed;
- And demonstrating that the firm is acting in the best interests of investors.
The Chair will be directly responsible to the regulators for complying with these responsibilities.
What does this mean?
The FCA has estimated that their proposals will require the sector to appoint a further 480 independent directors. This has raised inevitable questions over whether that many are available, particularly with new rules around conflicts of interest. Another challenging aspect is that these new independent directors do not need to have any previous Financial Services experience, yet will be considered senior managers under SMR.
What will the impact be on the role of existing board members?
The role of the existing board members has become much more challenging. They are now expected to:
- Find suitable independent directors quickly;
- Demonstrate that they are acting in the best interests of investors;
- Accurately assess the value of their funds;
- And, critically, ensure compliance with SMR.
What challenges will this bring for the board?
Any change in board make-up, particularly several new members in a short period of time, will have an inevitable impact on the dynamic of the board, as well as altering the conversations around the boardroom table and therefore how decisions are made. Boards will need to reassess their priorities and address how and where they are spending their time in meetings across strategy, performance and governance, particularly in light of the requirements from the regulator.
What will the impact be on board papers?
Inevitably, change and regulation in the boardroom bring board papers under sharp scrutiny. It will be key for asset manager board papers to ensure that assessment of value and transparency are woven into reporting at all levels. Board members are required to demonstrate that investor interests are being put first, and the conversations board papers stimulate around the boardroom table must reflect this. Papers must also have the right strategic content to provide the new independent directors with an accurate picture of the direction of travel, as well as cover performance metrics in a board-appropriate level of technical detail.
What will the impact be on Company Secretariat teams?
Company Secretaries play a crucial role in enabling board directors to discharge their duties. Part of the challenge will be ensuring that report writers understand the changes and write papers with the right level of technical detail and transparency. They will also need to work closely with the Chair to ensure that board meetings agendas are planned effectively to reflect the topics that need to be discussed.
So what should you do next?
In the asset management space, there are a few key topics that are vital to be informed about, and a few key questions that you should be able to answer:
- SMR — Am I ready for SMR? Do my report writers know what it will mean for their board papers? What can I learn from existing best practice?;
- Boardroom Dynamics — Do I know what my Chair and new board members need under the FCA rules? What conversations should the board be having and how can I help them assess their priorities?;
- FCA Requirements — How should value for money, transparency and putting investors first be reflected in my board papers?