Friday HighlightNov 30 2018

Time to act on FCA calls for cultural change

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
Time to act on FCA calls for cultural change

A lack of trust and transparency in the relationship between asset managers and their customers has prompted the Financial Conduct Authority (FCA) to make a timely demand for cultural change in the City. 

The age of complacency in the City is over, FCA chief executive Andrew Bailey told the Investment Association earlier this month, consumers must be better served by financial institutions.

As part of a drive to encourage cultural change, asset managers have been mandated to have in place at least two independent non-executive directors (iNeds) so that they make up at least 25 per cent of the executive by this time next year. 

The change came after a lengthy investigation into the asset management sector which concluded that rules to “prevent undue costs being charged” were simply not working.

Finding the right calibre of candidates with the expertise to question with confidence and speak up when things are going awry will be a huge challenge.

The watchdog clearly sees iNeds as being at the vanguard of necessary cultural change within asset management circles. Mr Bailey underlined this when he told the Investment Association that there needs to be people involved at a senior level “who can ask the difficult or challenging question”.

It marks a step change in how the regulator perceives the allocated roles and responsibilities of individual board members, with the onus on iNeds to be more visible so that independent voices are heard at a senior level.

The change cannot come quickly enough.

It has been a decade since the collapse of Lehman Brothers, but we still regularly read about companies falling by the wayside because of poor corporate governance structures – Patisserie Valerie, anyone?

What next?

While the regulator is banging the cultural change drum, it would be wise for asset managers to see this latest rule change as an opportunity to take the lead in improving corporate governance standards. 

An effective iNed should be welcomed by the board as someone who is able to improve scrutiny of costs and charges, as well as making sure compliance standards are being met in the best interests of all stakeholders.

In an effort to appoint an iNed who is not only compliant but also exceeds the expectations of the board, it would be worthwhile conducting a board effectiveness review to assess where they would make the most impact.

The review will show the executive if there are any areas where it needs to make improvements. It might also be advantageous to have an appropriate iNed lead a parallel review so that governance structures are examined from a consumer perspective.

At the very least, being able to show they have considered whether there is a need for a review – and who it should be done by – shows that the board is listening to regulatory concerns over consumer interests.

Make no mistake, if the sector fails to act the FCA has indicated that it will, rightly in my view, be forced to move to a majority non-executive director regime. This is a bold statement, underlining the severity of failing to take the rules seriously.

To ensure independence, candidates cannot have been paid by the fund manager for five years before their appointment, nor have had any business relationship with the fund within the previous three years. Existing non-executives who don’t meet the criteria can stay, but they will not count towards the quota of independents.

Finding the right calibre of candidates with the expertise to question with confidence and speak up when things are going awry will be a huge challenge.

This becomes more pertinent when you consider that some commentators suggest an additional 480 iNEDs will be needed to fill the vacancies.

While the regulator has left it to the discretion of the authorised fund manager (AFM) whether it will accept iNEDs who sit on rival AFM boards, there are benefits to looking outside the traditional circle of candidates.

It is time to widen the recruitment pool. Hiring from outside asset management circles may have some advantages, not least improving the diversity of many AM boards.

It may not be necessary to look outside financial services sectors, indeed it can have benefits – both the banking and insurance markets have plenty of grey hairs with enough battle scars to take on the demanding role.

But becoming an asset manager iNED is a tough job, akin to trying to get an equity card to perform on stage when you’ve never been on stage to get the card in the first place.

Working with established boards and challenging the norm takes someone with confidence. Firms need to look for someone who acts professionally and with integrity, holds a strong but balanced view. Someone with the ability to stand up and be counted, and who will not get pushed around easily.

It can be quite difficult across the entire iNED sector to acquire the necessary skills and then, once they have them, the opportunity to build experience.

A good place to start is by assessing your own skills and getting the right training in areas where you need it. Many people build experience by taking up board positions in other sectors, such as in health or education.

These are efforts that can be taken up by individuals but there must be a broader consensus from all board executives to drive up standards for iNEDs.

We need to be sure we have the right calibre of people to provide best practice services to asset management firms.

In my view, it is likely the FCA will substantially roll out such changes to the majority of substantial financial services firms within five years.

The FCA has told asset managers they need to improve standards for consumers and stakeholders.

In taking the changes seriously, the sector is setting the tone for all financial services, and showing in a practical way that consumer rights matter.

Gary Dixon is the chairman of the Association of Independent Non-Executive Directors (AiNED)