16 May 2017
Foxes guarding the hen house? A survey conducted by LCP has found that 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%.
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.
While offshore fund centres are often regarded as the ‘wild west’ of investment funds, they actually score higher than the UK for fund governance best practice.
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.
“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,” said Gibson. “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.”
Directors responsible for investment funds are often affiliated to the investment manager and this can cause conflicts that disadvantage investors.
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.
Following on from the FCA review, 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.
In particular, 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,” said 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.”
Access our report on key findings from the survey here