Leading the way

There are many positive things to say about the Financial Conduct Authority’s announcement this week of new measures to ensure the investment industry offers better value for money. But investment company directors and fund managers reading through the FCA’s list of remedies, the culmination of a two-and-a-half-year probe of the investment industry, might be forgiven for looking rather smug; many of the regulator’s proposals look rather as if they have been inspired by the structures and practices of the closed-ended fund industry.

Above all, the FCA’s aim is to make investment funds more accountable and transparent for their investors. There will be a requirement for funds to appoint independent directors, for example, and to publish reports that look at whether investors have received good value for the fees they have paid. Fund officials will also have to accept personal liability for that value, with a new requirement to act in investors’ best interests.

All of which is admirable – and also absolutely in line with how the investment company sector operates.

For closed-ended funds, company law, with all the fiduciary responsibilities it brings, is just as binding as financial regulation. This isn’t just a technical matter; it ensures investors in these funds have many of the protections that the FCA is now trying to put in place elsewhere.

Above all, investment companies must appoint independent boards of directors who each have a legal responsibility to act in the interests of the shareholders of the company – the investors in the fund. This is a very different construct to an open-ended fund, which is set up and run by a fund management company primarily motivated by its own interests.

From this structure flows all the other accountability and transparency measures that investment companies must provide – the requirement to publish annual reports and accounts, for example, and the duty to hold the fund manager to account for his or her performance; where this performance fails, the board can (and very often does) dispense with their services and bring in a replacement.

These principles have stood the test of time. The investment company sector turned 150 last month, with many of the longest-established funds in the industry still going strong. Their endurance reflects their agility and flexibility – over time, the boards of these funds, working with their managers, have changed course, pursued new investment remits and pivoted their focus several times over; this has only been possible in the context of a structure designed for shareholders rather than the narrow interests of a fund manager wedded to a particular mandate.

None of which is to suggest investment companies are perfect. In the past few years, closed-ended funds have come under pressure themselves on charging, with many boards now rethinking practices such as performance-related fees. Investors in some funds will no doubt have criticisms of their boards, believing they haven’t acted quickly enough or in the right way when an issue has required intervention.

Nevertheless, the corporate structure that underpins investment companies is a crucial bulwark for individual investors faced with the powerful vested interests of the fund management industry identified again by the FCA’s latest investigation. In their independent boards they have representatives with a legal duty to act on their behalf.