Global Trustee and Fiduciary Services News and Views Issue 50

Prime, Futures and Securities Services | Culture and Conduct 46 UK AMMS and SM&CR Leaders on UK fund boards find themselves reconsidering their personal responsibilities and governance arrangements in light of the Financial Conduct Authority’s (FCA’s) Asset Management Market Study (AMMS) final report published in April 2018, and, in July 2018, the extension of the Senior Managers & Certification Regime (SM&CR) to all FCA firms. 1 These introduce new requirements for UK boards of Authorised Fund Managers (AFMs), most notably the requirement for INEDs and the annual assessment of value. As INEDs continue to define and evaluate their existing board impact, and executive leaders consider new senior management requirements, the practical challenges of both are personal to individuals. Independent challenge Why is independence important? Many historical governance failings have been due, at least in part, to a lack of a truly independent challenge of the executive. For example, good independent directors are able to evaluate and challenge existing internal audit and risk frameworks. Many failures result from an inability to identify emerging and potential risks and their impacts, and a lack of challenge to the executive. When the J.P. Morgan London Whale (so named because of the market-moving potential of funds under his control) lost USD6.2 billion, GOOD AT EFFECTIVE CHALLENGE? APPLY WITHIN, AS THE DEMAND FOR INDEPENDENT NON- EXECUTIVE DIRECTORS RISES. . . Coco Chanel said, “The most courageous act is still to think for yourself. Aloud.” In this article we discuss the importance of the voice of independent non-executive directors (INEDs) on fund boards and compare those requirements across boards in the UK, Ireland and the US, while looking at responsibilities of fund boards more broadly, together with some of the challenges in finding a new population of INEDs against a backdrop of increasing regulatory and client expectations. there was found to have been little evidence of any challenge from the executive or the independent directors. Risks weren’t escalated and reported. And there was no board oversight of losses and limit breaches. The Whale took risk positions in a department of the bank that had a hedging strategy, triggering numerous limit breaches that went unescalated. There followed an internal change to the risk methodology, which wasn’t properly evaluated and included a spreadsheet error that resulted in risk being underestimated by half and even riskier position taking. There was little evidence of independent challenge of the change to the methodology, or adequate reporting mechanisms to alert the board when this trader’s positions went on to exceed the entire value-at-risk appetite of J. P. Morgan without mitigation. At the Royal Bank of Scotland, while there was some executive challenge of a dominant CEO, it appears that conflicts of interest weren’t addressed. The risks that can emerge where there is a dominant CEO aren’t merely ones of difficult relationships between the CEO and the board, staff, shareholders and regulators. More seriously, they can also result in a lack of effective challenge by the board, senior managers and independent directors to the CEO’s proposals, resulting in risks being overlooked and strategic mistakes being made. In response to the 2007/8 banking crisis and significant conduct failings such as the manipulation of LIBOR, Parliament set up