Charges and fees can be reduced through better governance, says the Pensions and Lifetime Savings Association's Luke Hildyard, and proposes remedies.
Following the consultations on the interim report, and the proposals to reject the undertakings in lieu provided by the major investment consultants, comes consultation paper 17/18.
We recommend a requirement to appoint a majority of independent directors to AFM boards, rather than just 25 per cent
It would be easy to surrender to consultation fatigue by this stage, but to do so would be a grave mistake. The discussion initiated by the FCA proposals offers a new opportunity to introduce a stronger and more effective governance regime of authorised fund managers. If the new measures are sufficiently robust, this could provide better scrutiny of how investments in these funds are managed on behalf of clients.
According to the Investment Association, institutional investors (mostly pension funds) have around £1tn invested in pooled funds, with a proportion of this eaten up by costs and charges. If even a small element of these costs can be reduced through better governance, this would enable significantly better outcomes for pension scheme members.
There is still room for improvement
We believe the FCA’s key proposals will help, but have identified ways in which the proposed measures could be refined.
Their recommendation that approved fund managers be required to conduct value-for-money assessments and report on their findings is welcome.
But in our response we suggest that the assessments should cover additional factors, including how the fund manager has sought to oversee and shape its organisational culture, as well as the considerations proposed by the FCA, such as fees and charges or quality of service.
Aspects of the fund manager culture – such as its pay policies and use of incentives – directly affect the cost and value accruing to clients, so this should be reported on and then managed accordingly.
The response also argues for stronger independent governance of approved fund managers. The FCA suggests a requirement for at least 25 per cent of AFM board members to be independent. But if non-independent directors comprise a majority of the board and control the chair’s position, they are able to shape the priorities, decisions and direction of the AFM, even if the independent directors provide a robust challenge.
Therefore, we recommend a requirement to appoint a majority of independent directors, rather than just 25 per cent. This would ensure proper scrutiny and oversight, leading to better value for clients.
Luke Hildyard is policy lead for stewardship and corporate governance at the Pensions and Lifetime Savings Association
