Only half of UK domiciled funds have any independent directors, leading to calls for funds to have a greater independence of fund boards to “limit the scope for conflict of interest”.
The figure is much higher than funds domiciled overseas, for which just 20 per cent of funds have no independent directors, according to a survey by LCP of almost 300 investment funds used by UK pension schemes. The UK is seen as a leader in fund governance but LCP believes the results suggest 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. LCP partner Matt Gibson would like 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, LCP said. However, the Financial Conduct Authority’s (FCA) 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, LCP said 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.”