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How did it come to this?

Selling investment products directly in the late 80s was an appealing proposition for many. Harry Enfield’s ‘Loadsamoney’ character may have depicted a humble plasterer, but the financial services world was awash with high-earning, commission-driven sales people to whom the word ‘governance’ would not have featured heavily in the day-to-day vernacular. Effective management or ‘governance’ of these ‘silver-tongued, sales machines’, meant keeping them ‘out there’. No distractions. Let others do their admin. Don’t moan if they’re a bit late with expenses every now and then. Keep them away from head office and the ‘business prevention units’ etc. These guys were the front line. The revenue generators.

I exaggerate for effect, of course, and would strongly argue that the modern distribution functions of today’s UK and European fund managers are as critical to the bottom line as ever. Thankfully, times have changed and professional fund distribution requires a multi-faceted approach, with deep client and technical knowledge, allied to an increasingly important regulatory contribution.

Inflection points

Reflecting on my own career, I can clearly see when key FSA/FCA initiatives created strategic inflection points that really mattered for fund distribution trends. So, although by the mid 2000’s I would have been managing distribution teams, there was a clear motivation to understand the bigger regulatory picture, feeding back the potential implications to internal stakeholders, product teams and board members.

Most notable of the initiatives from my recollections would be the Retail Distribution Review (RDR), Suitability and Centralised Investment Propositions. Over time, one could see the connectivity of so many of the regulatory papers and the intended direction of travel. The RDR took many years to play out and its implications were rightly key inputs to a successful fund distribution, share class pricing and product strategy. Throughout this period, it wasn’t just the leaders of distribution teams whose input were increasingly being sought by a whole plethora of internal stakeholders. Even the most ‘salesy’ intermediary fund floggers had a vital input to the internal feedback loops. Which IFAs were moving to fee-based structures? What platforms were winning share? Clean classes or rebates? How would the wealth managers respond, etc. etc.

I think the TCF initiative from 2006, further accelerated the growing importance of monitoring distribution flows and widened the interest in the business of what intermediary clients were up to, from internal teams. Many dashboards were created, reports drafted, data disseminated.

Readers may be starting to think about how to get to grips with the FCA’s Consumer Duty initiative. The latest paper, all 243 pages of it, was a Christmas gift that for some may still be in the reading pile. At first glance it sounded like an obvious ‘upgrade’ to TCF and I was reminded of the pretty useful (and thankfully short) guide to MI the FCA produced in 2007, which is still very relevant today.

Of course, Consumer Duty is far broader in reach, but my observation of the ‘connectivity’ of so many papers remains valid. Purveyors of Irish mutual funds/ETFs will be well-aware of the Central Bank’s CP86 paper. This specifically required boards to review ‘patterns of distribution’ for their fund ranges, which included everything from flows, pipeline, resourcing, local issues, target clients, the competitive landscape.

For SICAVS, the Luxembourg regulator has similar provisions around oversight of delegates including distribution and requires the initial and ongoing due diligence of distributors. Back in the UK, we’ve had the FCA’s own review of the implementation of MIFID II requirements on PROD, Distributor Oversight and MI, featured again.

Prior to this, we also had various papers about liquidity. Living through the liquidity squeeze in open-ended property funds following the EU referendum vote in 2016, was definitely one of those ‘learning experiences’. Despite the focus on notice periods and enhanced notifications to clients, there were some crucial learnings around ‘client liquidity’. Knowing the proportion of an underlying fund held by clients who could act instantly with discretion, was a key metric. Assessing the buying intentions of key wealth management clients, cannot easily be done without the input of those who actually know the clients best. Once again, the importance of MI and distribution teams in any oversight/governance programme is clear to see. Spread sheets, exchanged between fund groups and distributors, are clearly not enough on their own. The 2007 TCF MI guide asserted that MI must be analysed and monitored, and that qualitative information is just as important as quantitative data. Regulators might well expect that 15 years on, we have this stuff pretty-well nailed.

So, what to do?

With so many varying requirements for overlapping data, particularly for firms offering both UK and offshore fund ranges, there is a need for a consistent approach that utilises the expertise and client insight of distribution teams, helps to provide fund board directors with the reassurance they need, while exceeding the standards required by fund regulators today and in the future. For instance, the latest Consumer Duty proposal includes a requirement for distributors to undertake a value assessment, suggesting that the FCA is finally starting to think about a ‘full distribution chain’ approach to value assessment. It also suggests that wealth managers and advisers will have a lot of work to do in this space.

There will be many examples of ‘good practice’ in evidence across UK and Offshore fund boards and finding these is a key element of the work of the Fund Boards Council in 2022. We intend to share these best practice examples to help member firms and boards, and to engage with regulators to increase standards and consistency. I am delighted to have joined the Fund Boards Council team to lead this work and look forward to discussing this with many of you in the coming months.