Experimental pains

Not yet subscribed?

Keep up to date with the latest handpicked articles, interviews, features and FBC news.

Subscribe to Fund Boards Council news

Enter your details below to receive the latest news and events by email.
  • FBC News

FBC assesses FCA’s report on AoV

Not in a long while has the UK fund industry had to contend with such significant regulatory intervention –requiring fund boards to feel their way around a new set of standards, going beyond just being compliant, and doing this with minimum prescription.

It’s been two years since UK authorised fund managers (AFMs) have had to provide evidence that they are giving value to their mutual fund investors via the less-than-prescriptive annual Assessment of Value (AoV) report. With over 200 AoV reports analysed by Fund Boards Council in the first year and logged in the member’s only searchable AoV Report Bank, what has been the prognosis so far?

‘Variable’, ‘encouraging’, and ‘difficult’ are some of the oft-used adjectives from within the industry. But the Financial Conduct Authority (FCA) has a completely different set of adjectives. In its first formal Review of the AoV process released in July, and based upon in-depth discussions with 18 AFMs, the regulator came away most unimpressed, and said the efforts made fell well short of expectations.

And it was this FCA review, along with the June review of host/independent authorised corporate directors (ACDs), that formed the basis of FBC’s bi-annual Chairs’ Council meeting in mid-September. The meeting was moderated by Philip Warland (FBC’s advisory board chair), and supported by Brandon Horwitz (FBC senior adviser), Anna O’Donoghue (head of product governance at Schroders), and Susan Wyderko (FBC advisory board member and past president of the influential Mutual Fund Directors Forum), who brought an important US perspective to the discussion.

The conversation, and subsequent debate amongst the fund board chairs and CEOs present, was conducted under the Chatham House rule. But Mr Horwitz, who led with a 10-minute presentation, made the following comment, drawing on, amongst other analyses, the FBC Chairs’ Memo issued in mid-July: “The FCA clearly consider the efforts made to date as falling short of their expectations. While acknowledging progress in some areas like switching investors to lower charging share classes, they highlight very significant shortcomings in how firms have considered AFM Costs, Economies of Scale, and how Performance has been considered.”

In their review, the FCA also observed many cases of independent non-executive directors (iNEDs) lacking a good understanding of the AoV rules, their role on fund boards, and the importance of challenging how executives approached AoV.

As we enter autumn, the two-year-old AoV process hitherto has left the FCA unimpressed while a large number of AFM senior executives and board directors are frustrated with the FCA’s seemingly excessive demands which come without better-defined guardrails.

No one said this was going to be easy.

What the regulator is absolutely clear about can be summarised as follows:

  1. The primacy of the fund board is non-negotiable, and is likely to get further entrenched as the AoV train rumbles on
  2. The FCA is expecting to see real evidence of the ‘awkward’ conversations around AFM Costs, Performance and Economies of Scale taking place in the AFM boardroom, and the extent to which decisions and outcomes are challenged by the iNEDs and other board directors
  3. The role of the iNED continues to come under considerable scrutiny, demanding fine judgement and balance on their part
  4. Whilst the importance of the AoV report (the public document) remains undiminished, it is clearly just the tip of the investment governance iceberg and the focus of the FCA’s attention is very much on the activities of the fund board, the executive and the extent to which AoV is now becoming business-as-usual
  5. Running an effective AFM fund board that that goes beyond the day-to-day risk and compliance measurement and mitigation is now table stakes

In fact, at the start of the AoV process, FBC’s Mr Warland remarked at a summer 2019 meeting that he would be happily surprised if there were any AoV-related remedies on the part of AFMs in the first year of reporting. Well, we can agree there have been some, and we’ll even go a step further and point out that some the AoV-related themes are spreading overseas. The discussion on costs and charges, even if not AoV in the round, has rapidly moved up the agenda for asset management regulators in Europe so much so that a small number of firms in the UK are now producing AoV-esque reports for their cross-border funds in Luxembourg and Ireland – some publicly-available and others for internal board consumption only. Further afield, there is also a discussion on competitiveness in fund management in Australia.

Say what you will, this must put, even if only, a wry smile on the faces of some people in Stratford, east London.