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Fitch: FCA Plan Bolsters UK Fund Board Independence, But Lags US
June 30, 2017 / 10:42 AM / 5 months ago

Fitch: FCA Plan Bolsters UK Fund Board Independence, But Lags US

(The following statement was released by the rating agency) LONDON, June 30 (Fitch) The Financial Conduct Authority's plan to reinforce fund governance will make UK director independence rules stricter than those in Europe's major cross-border fund domiciles, but board independence is still likely to trail well behind US funds, Fitch Ratings says. Recent regulatory changes mean fund boards will play an increasingly important role in the outcome for investors, and independent directors could help achieve better outcomes where there are potential conflicts between the interests of investors and the asset manager. The FCA's proposals, made as part of its wider review of the asset management sector, would require fund boards to appoint at least two independent directors and at least 25% of the total board membership to be independent. This would go beyond requirements in other major European jurisdictions for asset management. For example, the Irish Corporate Governance Code requires at least one independent director, while the ALFI code of conduct for Luxembourg investment funds recommends an independent director. Our recent analysis of 145 sub-funds found European UCITS funds had an average of 1.9 independent directors on each board, but almost a quarter had no independent directors at all. This trails far behind the US, where a minimum of 40% of directors must be independent, and in practice around 75% actually are independent. <iframe allowfullscreen src="// independent_dire ctors?src=embed" title="Almost A Quarter of Sampled Funds Have No Independent Directors" width="550" height="666" scrolling="no" frameborder="0"> Fund boards are required to put the interests of investors above those of the asset manager and their responsibilities are growing. For example, under recently agreed European money market fund reforms, boards will play a key role in determining whether liquidity fees or redemption gates should be applied. Fund boards were also required to approve the decision by several UK commercial real estate funds to prevent or limit redemptions in the wake of the Brexit vote. These decisions involve balancing the needs of exiting and remaining investors. Having more independent directors should reduce the risk that the asset manager's interests, for example the desire to maintain assets under management, also become a factor in the decision. The FCA's proposals also include measures to increase transparency on fees and charges for retail and institutional investors, and further strengthen the rules around benchmarking and past performance disclosure. These measures are likely to increase the pressure on investment manager margins, and increase the flow of money from actively to passively managed funds and to alternative asset classes, where margins remain wider. But margins are strong (EBITDA margins averaged 40% in 2016 in our recent peer review of traditional investment managers) and flexible cost structures should help offset some of the pressure. Cash flow leverage across the sector is also modest and firms generally maintain cushions against the benchmark thresholds for their ratings. Therefore we do not expect leverage growth to affect ratings in the near term, although continued performance turbulence may result in a further increase in cash leverage metrics. Contact: Alastair Sewell, CFA Senior Director Fund and Asset Managers +44 20 3530 1147 Fitch Ratings Limited 30 North Colonnade London E14 5GN Nalini Kaladeen Director Financial Institutions +44 20 3530 1806 Simon Kennedy Senior Analyst Fitch Wire +44 20 3530 1387 Media Relations: Rose Connolly, London, Tel: +44 203 530 1741, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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