FCA ACD industry review...
Wednesday 30th June 2021
FCA ACD Review Publication
In response to the FCA ACD findings and publication today (see link above), as leading experts in the ACD market place, much of the FCA findings will come as no surprise to the industry regardless of how strong the wording used is 'significant findings'.
Whilst the FCA is right to identify the concerns and lack of sufficient due diligence performed by the ACD, it must recognise the lack of understanding or support in providing guidance and advice to the standard that an ACD must employ when taking on a new manager or reviewing an existing manager in that way.
For example we have seen over the last decade the due diligence requirements from ACDs increase significantly and try to keep up with the changing environment, however many have done this with little to no support or guidance from the FCA.
In our view, the FCA, unfortunately has allowed the industry of fund oversight to 'run away' from it and as a result there are many different ACDs, models and standards employed today. If ongoing FCA regular review, understanding and governance was in place with them we have no doubt that many of the findings today on governance and conflict would be in a better place.
All clients (fund managers) we work with, successfully identify the conflicts and issues whilst outlining mitigation to these issues. The ACDs in turn do the same which in part works but from what the FCA is indicating it feels like mitigation is no longer an acceptable form of management and so elimination of the conflict and issues will now be needed. We need to becareful with this messaging as unintended consequences for the manager, ACD and investor may follow creating fundamental changes to the way managers operate the fund and ACD provides oversight.
The FCA demands for change over the next 12 to 18 months is interesting and whilst we agree change is needed the FCA really needs to address the biggest issue facing managers today and ACDs in the market place, which is the application of the Assessment of Value (AoV), that has been poor at best, across the industry.
Our view is a completely new strategy is needed for AoV which includes a total outsource from both the ACD and manager to a dedicated third party across the industry which the FCA can refine and direct in order to provide meaningful output. Too many times over the last 24 months we have worked with very respectable clients who have been forced to reduce their fees because of the AoV and fear of. This needs to stop today and the FCA needs to rethink this policy / guidance going into greater depth.
We welcome the recognition of the obvious and unmanageable conflicts with the ACD and manager but hope this doesn't then result in just more Non Executive Directors (NEDs) being appointed.
It needs to be much more than that and as previously identified with the recent examples when a fund does fall into trouble or the ACD fails, then an alternative ACD should step in at that point to avoid a catastrophic outcome for the investors, not the current process of the ACD taking over the fund and acting as manager and ACD.
The simplification of the existing rules that are in place today and closing of interpretation to things like 'spirit' and grey areas such as dilution levy will allow for a stronger industry oversight of funds.
An excellent opportunity in Brexit has presented itself and we would recommend now is the time scrap all the existing rules altogether and start again with a fresh look and understanding across the industry. This would require significant work and effort from the FCA but would leave the industry, investors and all interested parties in a much better place. Trying to 'patch' up on the existing rules that even the ex head of the FCA, Andrew Bailey, identified as not sufficient at his last treasury select committee meeting, is not the right answer. Now is the time for a complete rewrite of all the rules and application thereof.
Upon Brexit it was evident that the FCA were by far the strongest and most intelligent regulator across Europe as many of the recommendations and changes came from the FCA or as a result of FCA input. More interesting was the fact upon the FCA resigning from the several committees across Europe each one was invited back onto the various boards and committees immediately afterwards to ensure Europe was getting the input. The circumstances with Europe for financial services is unknown and whilst we must keep one eye on this the FCA has an opportunity to employ best practice changes across the UK.
The agreements between the manager and ACD should be carefully looked at to ensure the interests and triggers for change are always in the best interests of the investor and not for one party or another.
It comes as no surprise that the FCA has outlined the need for additional capital adequancy and whilst this may provide some reassurance, this isn't the answer to 'guard against risks' effectively. A greater focus on the compliance framework and understanding, as well as clear communication to investors is far more effective after all it is clearly made in the risk rating of a fund and the statement made with every investment and fund that even the most cautious and safest investments are made, 'You investments are at risk as the value can go down as well as up'.
The threat of intervention in relation to the FCA if progress is not made is disappointing without concluding or publishing the investigation into Woodford that has so far taken over 2 years. Should the FCA not wait until it has concluded this investigation before ensuring the implementation of changes on the basis that something maybe missed or it then may need to be changed?
In conclusion ACDs and managers need to work together to ensure investors (most importantly) are at the heart of everything we do but in order to do this the FCA needs to provide much cleaner and clearer advice.
One thing is for certain for new ACDs coming into the U.K. or managers who are looking to insoruce the ACD function the requirements have just become much greater but whether this is enough only time will tell.