From September 2019, UK asset managers will be required to have two or more independent directors on their Fund Boards. We look at the requirements of the role and what skills and attributes the asset managers are looking for.
In an earlier Insight piece, we looked at the implications of the Financial Conduct Authority’s (FCA) June 2017 Asset Management Market Study. In particular, we looked at the requirement of UK fund boards to appoint a minimum of two independent non-executive directors, the introduction of an annual assessment of value to determine if customers are getting value for money, and the increasing focus on governance issues.
In this piece, we drill down into more detail about the role and attributes someone might need to become an iNED and what the asset managers looking for.
From September 2019, the FCA requires all asset managers to have at least two independent directors on their Fund Boards, preferably more, and these independent directors need to make up at least 25% of the board. The FCA estimates that around 480 iNEDs are necessary to carry out independent board roles. Successful applicants must serve for a period of no longer than five years and, importantly, they need to come from a diverse range of backgrounds.
So, how do you become an iNED?
First, it’s important to understand the difference between a UK-authorised Fund Board and the Corporate Board structure of a UK Public or Private plc – they have different characteristics. A UK Public or Private plc has at least two directors (although more usually six to ten) and is governed by the UK Corporate Governance Code. The board, including full-time and non-executive directors, sets the agenda in terms of new initiatives, remuneration and guarding the interests of shareholders.
A UK-authorised fund board, however, has an Authorised Corporate Director (ACD) who oversees the running of the OEIC – short-hand for Unit Trust and Open-Ended Investment Company – and leads a board of directors. Regulated by the FCA, the principal difference between Fund Boards and Corporate Boards is that Fund Boards need to demonstrate a risk-based framework that places the interests of its investors at its core. In particular, as promoters of products and users of outsourced distribution services, they need to be particularly vigilant about any evidence of miss-selling.
In other respects, there are general similarities between Fund Boards and Corporate Boards. A Fund Board, just like a Corporate Board, will also consist of both full-time directors and external, independent non-executive directors. And it’s the iNEDS element we are focusing on here.
Train and train again
The FCA has stated that all iNEDS need ‘to have sufficient expertise and experience to fulfil their responsibilities’, but, critically, they don’t necessarily have to have a financial services background. Indeed, they may be drawn from a range of disparate backgrounds, including industry, the law, the public sector and even academia.
Against this backdrop, training is essential for potential iNEDs, in order to meet the needs of the asset management Fund Boards, whose requirements may differ from board to board. Potential iNEDs need to understand the opportunities and complexities that asset managers face. And they need to demonstrate commercial acumen, working in partnership with their fellow board directors, constructively challenging when necessary and bringing fresh insights from their own areas of expertise. Indeed, we firmly believe that a diverse board leads to a stronger board. Collectively, a combination of people from different ages, backgrounds and experience can combine to strengthen the Fund Board gene pool.
Prospective iNEDS need to develop their knowledge and understanding of the technical and regulatory matters asset managers face. They also need to understand the regulatory expectations laid out under the 2016 Senior Managers Regime, which increases the personal accountability of senior roles in the financial services industry. They also need an appreciation of marketing, distribution and governance, including product development. Most importantly, they need to understand the regulatory backdrop under which they are operating.
But it doesn’t stop there. Once an iNED is appointed, ongoing training is necessary to keep abreast of the latest regulatory developments.
For those contemplating an independent non-executive role, here’s an iNED checklist of the key requirements:
- Understand the regulatory expectations under the Senior Managers Regime
- Possess knowledge of marketing, distribution and product governance, including the product development process and the rules governing customers
- Understand key legislation, including Coll (The Collective Investment Schemes book), SYSC (Systems and Controls), COBS (Conduct of Business book), TCF (Treating Clients Fairly), and MiFID II (Marketing in Financial Services Directive).
Becoming an iNED isn’t easy. But for those with the requisite experience and ambition, it can be a highly stimulating and rewarding position. Our next Insight piece will look at the benefits of gender diversity within boards and how this leads to better decision making.