FCA: New independent directors rules to cost fund managers £28m a year

Board-Room-Meeting-Room-Business-700.pngThe FCA has estimated that the hiring of new independent directors to fund management boards will cost firms a total of nearly £28m a year, as it lays out better fund governance rules.

In its consultation paper on implementing the asset management study’s “package of remedies”, published today, the regulator says it will now require authorised fund managers to appoint a minimum of two independent directors to their boards.

The FCA estimates the 192 authorised fund groups will be charged up to £6.7m as a one-off cost to prepare for the new rules and recruit new independent directors for the first time.

On average, each firm will have to pay around £25,000 per annum. Assuming firms appoints an average of 2.5 new independent directors, the recruitment cost per director will be around £10,000.

But this cost will increase to £27.7m a year across the industry for remunerating new directors and for other “miscellaneous staff time” independent directors might need.

It is intended the costs associated with the new rules on independent directors are absorbed by fund management groups and not passed to investors, the FCA notes.

This matches FCA chief Andrew Bailey’s remark on how fund fees will continue to drop if competition in the sector continues to “prosper and develop”.

Subsequent to these new rules, the FCA notes the “break even point” will be a drop of fund management fees of 0.24 basis points per year, counting 65 basis points as an average cost for both active and passive funds.

The FCA says this fee level will drop “considerably more” in the future. It states “this is the case even after taking into account the one-off costs borne by AFMs, which are relatively small.”

This means UK authorised fund managers will be reducing their management fees by an equivalent of 0.36 per cent of their annual revenue.

FCA: Board rules not working as expected

Currently, fund management boards have five to eight directors, who are typically not independent. Firms are currently not obliged to appoint external members to their boards as they usually are members of the firm or the wider group they belong to.

In the new rules, the FCA suggests “at least” 25 per cent of fund firms boards should now have a minimum of two independent directors on each board, meaning a board with six members will need two independent directors, while firms with seven to nine would need three independent directors.

In its report, the FCA has raised concerns that current rules which are set to prevent “prevent undue costs being charged” to investors on are not working as expected.

The FCA says: “We believe that the introduction of independent members to AFM boards will provide an independent view and challenge to the deliberations of the board. This will help to reduce the tension between the competing interests of the investors and the interests of the AFM’s shareholders that are likely to arise as part of assessing value for money.”

Aberdeen Asset Management chief executive Martin Gilbert welcomes the FCA decision on independent directors the back of the benefits this has brought internationally.

He says: “I am a vocal advocate of the benefits of involving independent directors in fund governance, having seen how they help elsewhere in the world. While supporting FCA’s general moves in this direction, Aberdeen would advocate going further than the FCA currently suggests by introducing two independent directors on to the boards of UK open-ended fund ranges.

“This finer point notwithstanding, I certainly agree that strengthening the onus on both investment managers and fund boards to consider value for money for investors will help to protect investors’ interests.”

FCA new rules for independent directors

Source: FCA

39 This is reached by adding £1.9m which is the cost to AFMs of preparing to implement the requirement to assess value for money and £4.8m for AFMs’ costs in recruiting independent directors for the first time.
40 The sum of the £813,000 per year ongoing costs associated with the requirement for the AFM to assess value for money and the £26.9 million per year ongoing costs associated with the cost of the independent directors, which we expect AFMs to pass through to fund investors via increased fees or charges.
41 This £7,605 million figure has been estimated by taking the money weighted average AMC of 65 basis points for the relevant funds (calculated from Morningstar data for active and passive UK domiciled authorised funds), and multiplying this by the estimated AuM for these funds (£1.17 trillion, taken from Morningstar data, and sense checked against recent IA data). 0.0065*£1,170,000,000,000= £7,605 million. This figure has been cross checked against an estimation of AFM annual revenue figures arrived at from an analysis of data reported to the FCA by AFMs in FCA Returns, and found to be in close agreement.
42 Figure taken from Morningstar data, and compared with recent IA data.
43 £27.7m ongoing costs to investors divided by £1.17 trillion relevant AuM.
44 £27.7m ongoing costs to investors divided by £7,605m UK AFMs’ annual revenue.
45 Estimated from Morningstar data for active and passive UK authorised funds.