24 Aug 2020

Executive orders: the impact of iNEDs

The services of independent directors are giving fund boards a boost, argue the proponents of a new regulation 

By David Adams

6 minute read time

The services of independent directors are giving fund boards a boost, argue the proponents of a new regulation.


  • Since 30 September 2019, fund boards have had to include a minimum of two independent non-executive directors (iNEDs)
  • The involvement of iNEDs is prompting fund managers to make changes where funds may have not have been delivering good value
  • Success will depend on the availability of individuals who can perform the iNED role effectively – and there are calls for greater diversity of candidates

While new regulation can at times be challenging to implement, many will welcome the Financial Conduct Authority’s drive to improve governance across the industry. The FCA is planning a requirement for independent non-executive directors (iNEDs) to sit on fund boards, with an eye to improving fund governance and performance.

Since 30 September 2019, fund boards have had to include a minimum of two iNEDs, or 25% of the fund board if it has more than eight members. In addition, fund board chairs are now subject to the Senior Managers and Certification Regime (SMCR) and each board must produce an annual assessment of value (AoV) report for every fund.

In some cases, these changes effectively alter the nature of the fund board. “The appointment of iNEDs provides an important, independent oversight to what was previously, in effect, an internal board,” says Shiv Taneja, founder and chief executive of the Fund Boards Council.

The idea of having non-execs on the fund board should not seem too outlandish: many had already appointed iNEDs anyway; and it’s normal practice for non-execs to sit on similar bodies in many jurisdictions, including Ireland, Luxembourg and the US. Simon Ellis, a special adviser to iNED training company MosaicNED, who also serves as an iNED on two fund boards, thinks the FCA has tried to learn from other regulatory regimes, by creating a strong governance structure that links the iNEDs requirement, the SMCR and the requirement for an AoV report.

“iNEDs should bring a level of technical and industry knowledge to support senior managers while at the same time challenging them in a way that makes sure their feet are held to the fire,” he says. “You’re going to have people round the table who will challenge the executive and ask, ‘Is this in the investors’ interests?’

“As iNEDs get more comfortable and confident in their role, and as executives recognise the value of the iNEDs, then where the two work closely together we will see better outcomes.”

Delivering value

“The signs we’ve seen in our interactions with iNEDs have been very positive,” says Peter Christmas, director of client management at NatWest Trustee and Depositary Services (TDS). One change is that the presence of iNEDs seems to be encouraging more fund boards to invite depositaries, including NatWest TDS, to meet them more often.

“Previously, some clients would invite us to their boards on an occasional basis, but now we’re being invited regularly,” says Christmas. “In a number of cases iNEDs have also asked the depositary for their view of how the fund manager is operating; and asked about liquidity monitoring – that’s really important to iNEDs in the light of what happened with Woodford.

“Because the iNEDs are not involved in the day-to-day operation of the fund, they’re able to take a step back and ask questions like ‘Why do we do that?’ or ‘Tell me how that works.’ It makes people ask whether, just because they’ve always done something that way, it is still the right way to do it.”

“The introduction of iNEDs is a great opportunity for executive teams to address cultural flaws inside their firms”

Simon Ellis, independent non-executive director

iNEDs are also playing a key role in the creation of AoV reports. “If you look at the way AoV documents have evolved, there is now huge effort going into the quality of the research and the argument as to whether something is good value or poor value – and also into the relative simplicity of some of the documents,” says Ellis. “A lot of that is down to iNEDs saying this should be something an average client can understand.”

In consequence, he continues, some fund managers have started to make changes where it is now clear that funds have not delivered good value, by lowering fees, merging funds or closing funds – starting to deliver the outcomes the FCA wanted to see.

Some way to go

However, the success of the new regime will also depend in part on the availability of individuals who can perform the iNED role effectively. “Sitting on a fund board is quite a technical role, requiring a deep understanding of how asset management works,” says Taneja. “So most positions are filled by people coming from within the asset management industry. If you’re looking for diversity of experience, there’s not a lot of it.

“That’s a problem if you believe that diversity in any form is vital to the future of the industry. And there are other ways in which things are not diverse. Two thirds of them are men; and there are not many people of colour. But to expect all of this to have changed within the first year of these regulatory changes coming into effect I suspect would be unrealistic.”

MosaicNED is one of a number of industry participants seeking to broaden the pool of well-qualified candidates for the iNED role. It supports individuals who have the right experience to become effective iNEDs, putting them through an intensive training programme recognised by the Chartered Institute for Securities & Investment (CISI). The company is also actively seeking to address the diversity issues highlighted by Taneja.

“We’ve had about 60 people go through the programme, mostly from within the industry, with some amazing CVs,” says Ellis. He says the aim is to develop individuals who possess the technical and industry knowledge needed to perform the role, but can also help to move a firm’s corporate culture in the right direction.

“This is all part of the FCA’s agenda to improve the culture of the asset management industry,” he says. “The introduction of iNEDs is a great opportunity for executive teams to address cultural flaws inside their firms.”

Taneja agrees. “Longer term, the single biggest driver of change is going to be how the board operates from a culture and conduct standpoint,” he says. “That is going to be predicated around the role of the independent directors and the role of the chair. Together they will determine how the culture is set and how the board operates. On the back of that you start to get the remedies you’re looking for, around cost, transparency and so on.”

But, he repeats, it is unreasonable to expect these changes to deliver dramatic results overnight. “What I would say is that the early signs are positive,” he says. “But we’re only in the foothills and we’ve got to maintain the climb.”

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