Following the release of the UK’s Financial Conduct Authority ("FCA") regulatory report on 28 June, the topic of independent governance of UK funds has remained top of mind for investors and asset management professionals alike. In its report, the FCA proposes a package of remedies designed to enhance fund governance in the UK asset management sector, including the appointment of at least two independent directors to sit on the boards of UK management companies of authorised funds and UK or European UCITS funds, and for at least 25% of the board to be independent, non-executive directors.
Recent industry research has shown that despite its reputation as a leading investment funds centre, the UK lags behind other countries when it comes to enhancement of its fund governance regime. According to a recent survey conducted by LCP, more than 50% of UK domiciled funds do not have any independent directors whereas for funds domiciled overseas, the proportion of those without independent directors drops to just 20%. While the new guidelines promise to raise the bar on fund governance best practices, they also come at a critical period just ahead of MiFID II which comes into effect early next year and places new obligations on boards to ensure that good governance and protecting investor interests remains a priority.
Given these developments, the need for independent governance has never been greater and directors’ roles and responsibilities have evolved in tandem with the industry. First and foremost, there is an increasing emphasis on the director’s professional background and experience including the length of time they have served on fund boards and, in instances where a director is sitting on multiple boards, an ability to demonstrate that they have sufficient capacity to perform their fiduciary duties. While the primary oversight and risk management responsibilities remain, independent fund directors today are also expected to have a thorough understanding of all outsourced activities and functions so that they can efficiently review the performance and potential risk associated with a particular service provider. An excellent grasp of technology is also deemed vital in order for directors to obtain and analyse vast amounts of information on an ongoing basis. Lastly, directors are tasked with staying abreast of industry trends and best practices to ensure they have the knowledge and experience with respect to corporate governance matters rests to guide the fund accordingly.