On April 5, 2018, the Financial Conduct Authority published a Policy Statement and final rules relating to strengthening the governance arrangements of U.K. authorized fund managers. The need to enhance these arrangements was identified by the FCA in the Asset Management Market Study launched in 2015. The final AMMS report was published in June 2017 and set out remedies the FCA intended to implement to address identified issues. At the same time, the FCA published a consultation paper on the first set of proposals.

The Policy Statement sets out the FCA's response to the feedback on its proposals and the final rules and guidance. The new rules and guidance applies to U.K. AFMs in relation to their management of authorized funds (that is, authorized open-ended collective investment schemes). The rules will apply either on April 1, 2019 or on September 30, 2019, depending on the lead time that the FCA considers the industry needs to implement the required changes. Below is a summary of the FCA's decision on the various consultation points:

  • Strengthening the duty of AFMs to act in the best interests of investors: There is an existing duty on AFMs to act in the best interests of fund investors. The FCA is going ahead with its proposal to enhance an AFM's duty to act in the best interests of fund investors. An AFM will be required to assess, and justify to its fund investors, the charges taken from the funds it manages in the context of the overall service and value provided. This includes both charges that are usually paid directly to third parties and the management fees that AFMs set for themselves. The FCA believes that this is important as AFMs are agents of their investors—they act on their behalf and owe them duties—they are not solely product providers. The rules have been re-drafted to clarify that fund charges should be assessed in the context of the overall value delivered, instead of focusing on "value for money". In particular, the re-drafting clarifies that AFMs can assess performance over a time period appropriate to the fund's investment objective, policy and strategy. Also, AFMs will be required to publish a statement setting out a description of the assessment of value, either in the fund's annual report or in a separate composite report. The new rules will apply from September 30, 2019, instead of April 1, 2019, as was initially proposed.
  • Independent Directors: The FCA has largely not changed its proposed rule requiring AFMs to appoint a minimum of two independent directors to their board and for them to comprise at least 25% of the total board membership. The new rules will apply from September 30, 2019, instead of April 1, 2019, as was initially proposed.
  • Senior Manager & Certification Regimes: The FCA will introduce a new specific Prescribed Responsibility for AFMs when it extends the SM&CR to almost all financial services firms. This would make clear that a Senior Manager, usually the chair of the board of an AFM, must take reasonable steps to ensure that the firm complies with its obligation to carry out the assessment of value, the duty to recruit independent directors, and the duty to act in the best interests of fund investors. These rules extending the SM&CR are expected to be published later in 2018 and to apply from mid-to-end 2019.
  • Box Profits: The FCA is proceeding with the requirement for fund managers to return any risk-free box profits to the fund. It found that the managers of some dual-priced authorized funds, by matching the units of incoming and outgoing investors, were making a risk-free profit on the difference between the dealing prices for those matched transactions. Following consultation, the rules have been re-drafted to reflect technical feedback received from respondents and now allow some flexibility in how risk-free profits should be allocated. These rules will apply from April 1, 2019.
  • Share Classes: The FCA's final revised guidance removes the need for an AFM to get individual consent from each investor before moving them to cheaper but identical classes of the same fund. In addition, the open-ended notification requirements that the FCA had consulted on have been replaced with a recommendation that AFMs make a one-off notification to investors, which does not require a response, a minimum of 60 days before a mandatory conversion.
  • Trail Commissions: The FCA consulted on whether it should continue to allow the payment of trail commission. It has no immediate plans to propose any policy changes at this stage.
  • Extending the scope to other governance products: The FCA also consulted on extending the governance proposals for AFMs to unit-linked and with-profits insurance products and investment trusts (also referred to as investment companies). The FCA is undertaking further work on these products and expects to make a decision in the first half of 2019. Further changes to investment trust governance arrangements are being kept under review, but the FCA has no immediate plans to implement changes. The FCA confirms that, as initially proposed, it does not intend to extend the governance arrangements to pensions.

The final rules and revised Guidance should be read in conjunction with the FCA's second consultation paper, published alongside the Policy Statement, on improving disclosures by AFMs to their investors. The Policy Statement and final rules are available at: https://www.fca.org.uk/publication/policy/ps18-08.pdf   and the AMMS final report and the first consultation paper are available at: http://finreg.shearman.com/uk-financial-conduct-authority-publishes-final-as.

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