Global Trustee and Fiduciary Services News and Views Issue 50

Prime, Futures and Securities Services | Culture and Conduct 48 • Hasn’t been an employee of the AFM, group or delegated investment manager within the past five years. • Hasn’t had a material business relationship with the AFM, group or delegated investment manager within the past three years. • And can be appointed for terms of up to five years, with a cumulative maximum duration of 10 years. The FCA hasn’t brought in a limit to INED commitments (e.g. number of directorships), but has said it will keep this under review. Ireland In Ireland, only one INED is required on fund boards, but the Central Bank of Ireland (CBI) has looked to ensure directors have sufficient time to discharge their responsibilities by applying greater regulatory scrutiny to fund boards and directors where a director has more than 20 directorships or an aggregate professional time commitment in excess of 2,000 hours a year. This is in direct contrast to the current position of the FCA. Ireland’s fund industry also considered independence within its voluntary Corporate Governance code [Irish Funds Industry Association — 2014], which stipulates that individuals couldn’t be employed by the investment management group in the last three years (softer than the five-year UK requirement), paid by the group over the last three years or be a significant shareholder of the investment management group. It also stipulates that there will be at least two Irish resident directors and that at least 50% of all directors must be resident in the European Economic Area (EEA). Interestingly, the CBI has strongly hinted that the UK would be regarded as EEA-equivalent for this purpose post-Brexit, so it could be assumed that the director split might continue to be from the UK following Brexit. US In the US, mutual funds must have a minimum of 40% INEDs. And in practice, INEDs make up the majority (75%) of board membership in nearly 90% of fund boards, 3 though there’s no time limit to how long an INED can serve on a mutual fund board. Independent directors can’t have, or can’t have had over the previous two years, material business or professional relationships with the asset manager, its affiliates or the distributor. To summarise, UK requirements for INED membership will be more stringent than those in Ireland, and while the US requires a greater proportion of INEDs on mutual fund boards, the definition of a US INED is less prescriptive than in the UK. These slight jurisdictional differences can make it harder for firms to manage independence on a cross-border basis. Fund board responsibility — the value assessment UK The FCA has become more prescriptive in its expectations of AFM boards as a result of the AMMS, and now requires boards to make an assessment of the “overall value delivered” that considers a range of factors, not just costs and charges. All AFM boards must make the assessment, and it applies to all share classes of a firm’s products. The aim of the regulator’s intervention is to ensure AFM boards represent the interests of customers when considering how the firm has managed the fund in the broadest sense. To make an assessment of the value delivered, AFMs must assess each fund (and share class) against a non-exhaustive list of factors, summarised by the following: • Net performance: has reasonable performance been delivered over an appropriate timescale considering the scheme’s investment objectives, policy and strategy? • Costs: are they reasonable considering the service provided, and compared to comparable (e.g. comparable size and investment objective and policy) products provided by the asset manager (e.g. segregated mandates and other share classes in the fund) or by other firms? • Economies of scale: as fund size increases, are any economies of scale passed on to customers through reduced costs/charges? • Quality of service: does the range and the quality of services provided to customers support the charges levied? (These services may include aspects such as the quality of execution, and any additional tools or information provided by the asset manager’s customer website.) AFMs must address unjustified charges in the context of the overall value delivered to unitholders in line with the requirement for