Global Trustee and Fiduciary Services News and Views Issue 50

Global Trustee and Fiduciary Services News & Views | Issue 50 | 2018 47 the Parliamentary Commission for Banking Standards (PCBS) to recommend how to improve standards in the banking sector. PCBS recommended a new accountability framework focused on senior management. It also recommended that firms take more responsibility for employees being fit and proper, and that there be better standards of conduct at all levels in banking firms. Based on these recommendations, Parliament passed legislation, leading to the FCA and Prudential Regulation Authority (PRA) applying the SM&CR (which replaces the Approved Persons Regime) to the banking sector initially and onto all FSMA-authorised firms, including asset managers, by the end of 2019. SM&CR changes how those working in financial services are regulated and aims to reduce harm to consumers and strengthen market integrity by making individuals more accountable for their conduct and competence. As part of this, the SM&CR aims to: provide access to a wide range of investment strategies to retail and institutional investors. A key difference between a segregated mandate and a fund is the level of control a client has over how their assets are managed. An institutional client with a segregated mandate can closely control how its assets are managed through the drafting of, or amendments to, the IMA, and through regular interactions with the asset manager. In contrast, clients invested in funds have less control over the management of these assets, and must rely on the asset manager to manage the assets in line with disclosed information. Both clients and regulators are increasingly demanding more evidence that funds are operated in the interests of clients. Representing the interests of clients is one of the key responsibilities of fund boards. Conflicts of interest are a key risk in the asset management industry, and have been a global focus for conduct regulators over a number of years. To address the conflict between asset management companies and their clients, the US, Ireland and now the UK require INEDs to sit on the boards responsible for the operation of funds. Regulators also look to INEDs to bring appropriate independent challenge to the executive, manage potential conflicts of interest and represent the interests of fund investors by holding asset management companies to account. Requirements for INED membership on fund boards There are overlapping themes in the regulatory approaches to independent challenge globally, and key differences. Here we provide an overview of the approaches in the UK, Ireland and the US. UK The FCA AMMS introduces new requirements (from September 2019) for the boards of UK fund management companies to include a minimum of two INEDs or, if greater, 25% of the board. The FCA’s view on who would be considered to be independent is similar to the requirements set out in the UK Corporate Governance Code, which include that an individual: • Isn’t an employee or receiving payment for a role in the AFM or group. The implementation of SM&CR should further address some of the governance failings described above, and, as we progress towards the implementation date, asset managers should already be considering their governance, controls and reporting. How INEDs benefit asset managers Given the size of the asset management industry, conduct, independent challenge and governance are of great importance. Asset managers are responsible for significant fund assets — worldwide regulated open-ended fund assets total over USD50 trillion, excluding funds of funds. 50% of worldwide assets are in the Americas, 36% in Europe and 14% in Africa and Asia-Pacific. 2 While some institutional clients establish segregated mandates, where the assets of that client are separately managed against a defined investment management agreement (IMA), funds • Encourage a culture at all levels of staff taking personal responsibility for their actions. • And make sure firms and staff clearly understand and can demonstrate where responsibility lies.