Blog : BOARD TALK
|Posted on May 17, 2017 at 11:20 AM|
Oops. That's a bit of a governance FAIL.
More than 50% of UK domiciled funds do not have any independent directors. For funds domiciled overseas, the proportion with no independent directors drops to 20%, according to a survey conducted by LCP, the consultancy.
In the survey of nearly 300 investment funds used by UK pension schemes, LCP found that despite the UK’s leading reputation for fund governance, the jurisdiction lags behind when it comes to safeguarding the interests of pension scheme and individual investors.
It points out that while offshore fund centres are often regarded as the ‘wild west’ of investment funds, in fact they score higher than the UK for fund governance best practice.
Graphic: LCP Fund Governance Survey report May 17, 2017 London
Matt Gibson, partner at LCP, wants to see greater independence of fund boards to limit the scope for conflict of interest and to ensure fund boards act in the best interests of investors.
Matt Gibson, Partner LCP
“Perhaps counter-intuitively, the UK scores worse than overseas jurisdictions for independence. Historically, we feel there has been a degree of reputational complacency on the part of the UK. Funds should look at appointing a higher proportion of independent directors and undertake fee comparison exercises to ensure value for money from all service providers” says Mr Gibson.
There's that question of 'conflict of interest' issue again here. Directors responsible for investment funds are often affiliated to the investment manager and this can cause conflicts that disadvantage investors.
LCP notes that the FCA’s asset management market review has helped to shine a welcome light on the need for changes to greater align the legal structure, board composition and regulation of a fund with the fund’s responsibilities to act in the interests of investors.
But it argues that, following on from that, the UK should now be proactive to ensure the industry is being served as best it can be, including looking to adopt measures similar to those applicable in Ireland and Luxembourg (Europe’s largest fund domiciles). Appointing individual directors, rather than a corporate director, is one such approach, it says.
In particular, it points out that there is a marked lack of independent oversight of Open Ended Investment Companies in the UK, where two-thirds of fund boards had no independent directors.
“Rather than resting on its laurels and basking in the jurisdiction’s reputation, the UK should now look at measures to facilitate and encourage independence on fund boards,” says Mr Gibson.
“Even in the absence of legislative reform, investors in UK domiciled funds should challenge funds and the affiliated investment managers on these grounds to raise standards across the industry” he adds.
The findings from the survey can be downloaded here.
Last month LCP produced another useful report, showing that investment companies are not passing on the benefits of market growth and subsequent economies of scale to investors in the form of lower charges.
"Pension funds are paying asset managers up to 70% more than six years ago, highlighting concerns that investors are losing out due to a severe lack of price competition within the investment management industry" wrote the Financial Times in its coverage of it.