Some time ago, in consultative paper CP17/18, the UK's Financial Conduct Authority raised the possibility of changing its rules for fund managers, partly by altering the arrangements that govern their duties as agents for the HNWs who invest in their funds. Its new policy statement (PS18/8) has done so and forms part of a wider campaign to improve competition in the sector.

The FCA states, none too grammatically or clearly, that "agents should be accountable to their underlying beneficiaries on how they deliver value." Its new rules state that funds should assess (i.e. charge) fees in the context of the overall 'value' they are 'delivering,' rather than using the term ‘value for money.’ It has also decided on an 18-month implementation period, ending on 30 September 2019.

The new rules, when they come into force, will require fund managers to appoint independent directors to their boards. The regulator defines an 'independent director' in a rather circular fashion as a director whom an applicant (i.e. either an issuer which is applying to have its securities admitted to the FCA's official list in accordance with section 74(1) Financial Services and Markets Act 2000 or an applicant for the FCA's approval for a prospectus that relates to transferable securities) or a listed company has determined to be independent in accordance with the UK Corporate Governance Code.

Under section B.1.1. of that code, the fund's board ought to justify itself in its annual report if it decides that a director is independent notwithstanding the fact that he has:

• been an employee of the company or group within the last five years; or n he has, or has had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company; or
• he has received additional remuneration from the company apart from a director’s fee; or
• he participates in the company’s share option or a performance-related pay scheme, or is a member of the company’s pension scheme; or
• he has close family ties (this nebulous phrase might allow nephews to pass through the net) with any of the company’s advisors, directors or senior employees; or
• he holds cross-directorships or has significant links with other directors through involvement in other companies or bodies; or
• he represents a significant shareholder; or
• he has served on the board for more than nine years from the date of his first election.

The policy statement says that independent directors must form at least one-quarter of each fund board and there must be a minimum of two.

The FCA is also introducing a new specific 'prescribed responsibility' (which it defines elsewhere as a specific responsibily that it requires firms to give senior managers) for fund managers as part of its drive to extend its Senior Managers' and Certification Regime to almost all firms that offer financial services. This 'prescribed responsibility' states that a senior manager, usually the chairman of the board of a fund management firm, must take reasonable steps to ensure that his firm complies with its legal/regulatory obligations to 'assess' value, to recruit independent directors, and to act in the best interests of its investors.

Managers of some 'dual-priced' funds are making risk-free profits - an activity on which the FCA frowns - when dealing as principal in the units of their funds. The FCA wants to make them pay (the word it uses is 'repay') these profits to the funds, for the benefit of investors. It is going to allow them some leeway in the way they allocate these 'repayments' as long as they do so fairly and in the interests of investors.

Guideline 8.5.9-A G(1) sums up the FCA's attitude on the subject: "The authorised fund manager may commit its own capital to hold units for dealing as principal and may seek to profit from gains in the value of the units it holds, when it issues or redeems units at one valuation point then sells or cancels them at a later valuation point. However, it should not profit from situations in which it is not exposed to an equal risk of loss if the units fall in value, or from the ability to match simultaneous sales and redemptions at different prices at no risk to its own capital."

A dual-priced fund has an offer price at which one buys and a lower bid price at which one sells. A single-priced fund is bought and sold at the same price, subject in some cases to a dilution levy. The rules regarding these 'box profits' will come into force on 1 April 2019, six months before the others do.

The amended rules are in the Collective Investment Schemes sourcebook (COLL), a part of the FCA rulebook. The FCA still does not know the date on which it will extend the Senior Managers and Certification Regime to financial services in general, but expects it to fall in mid-to-late 2019.