Written by Alex Ktorides
From 1st April next year, Authorised Fund Managers (AFMs) will be subject to new measures as set out by the Financial conduct Authority (FCA) in its April policy statement, where it specified changes to the [FCA] handbook.
The policy statement is particularly relevant for AFMs in relation to their management of authorised open-ended collective investment schemes.
As ever with the FCA, the implementation dates are strict and AFMs will need to be laying the groundwork today in order to be ready.
Box profits – comes into effect on 1 April 2019
There is a change to the rules which require AFMs to not retain so-called risk-free box profits. It has long been the case that dual pricing of funds (rather than single pricing) has ensured that investors pay any resulting transaction costs fully – which promotes fairness where conversion factors would otherwise reduce the fund value. This model has been called the box model, however, it was found that fund managers acting as principal could retain dealing profits without risking their own capital by simply setting the dealing prices to reflect the trend of transactions. Investment holders will be pleased to see that a single pricing model has not been adopted (which could reduce their funds). The box model has been retained but risk-free box profits should, in future, be paid into the fund.
Independent directors – comes into effect on 30 September 2019
The policy states that AFM boards need to be constantly striving to achieve a “balance” on their board composition between the competing interests of the fund investors and the equity holders – the shareholders. What this means in practice is that AFMs will now need to appoint independent directors to their boards so that there are a minimum of two, comprising at least 25% of the total board membership.
To be ‘independent’, directors should not serve for more than ten years without a five-year gap per fund, and should not have been paid by the AFM group in the last five years prior to appointment or had a material business interest with it for the last three years. They should also not have any close relative who is employed in a senior position in the AFM or the group. There are transitional provisions for existing independent directors.
The FCA deliberately does not define ‘material business interest’, leaving this to the AFM and its legal advisor – which underlines the importance of engaging a specialist firm [like Gordon Dadds LLP] for advice. It will not be an excuse for an AFM to claim that the cost of independent directors is disproportionate to the size of the fund.
Value for money (VfM) – comes into effect on 30 September 2019
Continuing the theme of stronger governance, there is an additional change over the so-called Value for Money proposal (VfM). This will require AFMs to annually confirm that they have considered and assessed the VfM for each fund under management and that it offers good value for each investor class. This builds on the duty to act in the best interests of investors and arguably imposes and new standalone duty on AFMs that should not be taken lightly.
Senior Managers and Certification Regime (SM & CR) – comes into effect late 2019
The Senior Managers and Certification Regime (SM&CR) replaces the current Approved Persons Regime, changing how people working in financial services are regulated.
Easier switching for retail investors to cheaper share classes – final recast guidance to FG18/3
There is a new requirement to move investors to cheaper but identical fund classes. Previously, the FCA had said that: “Fund managers should get individual consent from each holder before converting them to better-value but otherwise identical classes in the same fund. Now, if the fund manager has the power to carry out a mandatory conversion, the recast guidance recommends making a simple, one-off notification to each holder at least 60 days ahead of the conversion.”
What should asset managers do next?
We recommend that you consider your governance arrangements, particularly those that relate to their duties as agents of investors in funds.
Authorised Fund Managers should take legal advice as soon as possible on the implications of the policy statement for their business. The rules are set out in precise language, there are key dates and transitional periods to be aware of, plus there is guidance to be reviewed and reflected into changes for both governance and for the practical arrangements that are in place for fund management.
Thank you to Alex Matheson, trainee solicitor in our Regulatory Solutions department, for his help in preparing this article.
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