On Monday 9th November, as part of the AIMA Fund manager briefing series, INDOS was pleased to present to members, covering developments in fund governance, noting how it has evolved over recent years and why it is such a key area for regulators and investors alike, particularly given perceived failings in governance which have led to a number of high-profile fund suspensions such as Woodford last year. Below is a summary of some of the key messages from the presentation.
Following the 2008 financial crisis, there have been two key drivers behind improved governance within the alternative funds industry; new regulations such as AIFMD and Senior Managers & Certification Regime (SMCR) and investor focus on operational due diligence including the role and composition of fund boards. A fund board which is diverse and independent, and which can perform robust oversight and challenge will add value.
In the UK governance and culture are clear FCA priorities; a key outcome of the SMCR is to improve the standards of fund governance and recent FCA Dear CEO letters to the asset management industry deliver a very strong message; overall standards of governance generally fall below FCA expectations.
On a global basis, we are also seeing regulators take actions and increase regulatory oversight to continue to improve manager and fund governance and therefore investor outcomes.
The Depositary is viewed by the regulators as a cornerstone of good fund governance and regulators are also keen that processes have real substance both in locations and in reality. However, the role of the Depositary can sometimes be interpreted as a tick the box exercise. Often the Depositary is affiliated to the Fund Administrator which presents a conflict of interest given a core role of the Depositary is to oversee many of the outputs of the fund administration process.
Increasingly we are seeing awareness increase amongst managers, fund boards and investors of the advantages of an independent solution where the Depositary acts without potential conflict and in the best interests of investors thereby enhancing the governance structure. In addition, forward thinking managers are taking a more holistic approach to compliance and governance and leveraging the role performed by their service providers, such as the depositary, as a core part of their governance and oversight model.
Governance will continue to evolve. The core building blocks of good governance are in place but firms should always ensure they have the right service providers that add value, highlight risks, and enhance the governance structure.