07 Apr 2022

Fund governance in 2022: leading on investor protection

In 2021 the FCA devoted significant attention to the governance and infrastructure of the UK funds regime

By Peter Flynn

Associate, Funds Regulation & Governance

3 minute read time 

In particular, we saw the publication of the Host AFM review, and, for depositaries, feedback and engagement on AFM replacement processes under COLL 6.5.

The whole industry paid close attention to the Host AFM review as it contained valuable best-practice feedback, not just for hosts but for market participants more broadly. From our perspective as a depositary, we closely analysed the FCA’s report to ensure appropriate alignment our own robust client governance oversight structures and processes.

Building on both initiatives, we enter 2022 with a renewed focus on delivering best in class client oversight and governance and remain at the forefront of protecting investors.


Enhancing oversight

The FCA has engaged with nine UK depositaries on COLL 6.5, publishing its feedback in May 2021. The feedback set out how depositaries could enhance their processes, governance and ‘playbooks’ to ensure that their engagement with AFMs was as focussed as possible on protecting end investors.

A number of other enhancements were proposed in the FCA’s feedback letter to depositaries, such as robust triggers for escalation and action, and granular indicators of firm stress (including aspects such as adverse press, breaches, fines, liquidity issues or significant outflows). The feedback contained steers in terms of governance, timeframes, roles and responsibilities. As a result, the FCA’s proposals will help to ensure that the depositary sector – critical to the overarching supervision and oversight of the funds industry – is fit for the future.

As an entity we have engaged with the FCA throughout the process, enhancing our playbook and oversight process execution.

This includes working closer with clients to better understand their overall health as well as their internal monitoring mechanisms and KPIs, including financial indicators, governance structures, and operational performance metrics. Combined these will support our broad understanding of our clients’, including verses peers and the broader market.


Understanding the benefits

The benefits to these enhancements are clear: we will have a better understanding of how our AFMs manage their funds and associated operating models, improving our oversight and governance for the benefit of the underlying investors.

The FCA remains focussed on enhancing the integrity of the UK’s financial system, and the funds industry is evolving at pace with the regulatory landscape. As the UK’s single largest independent depositary, we play a key role in ensuring the UK funds market operates in a safe and well governed manner for the benefit of all investors and the health of the wider ecosystem.

As we look ahead to the rest of 2022 it is clear that the governance agenda remains front-and centre: the FCA has said it will revisit the Host AFM review, following up to understand how its feedback to market participants has been digested and embedded by firms in scope. The industry as a whole should consider these insights and adapt accordingly. 


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