Fund Governance Insights

Depositary Brief: a valuable year

7 minute read time

At a recent NatWest Trustee and Depositary Services webinar, funds industry figures convened to discuss progress made in the first year of the Value Assessment Reporting regime, and prospects for the future.

Central to the discussion was whether Value Assessment Reports (VARs) had in fact added value to investors, or if they instead represented a tick-box exercise with little real value.

For Peter Capper, fund and investment risk specialist at The Investment Association (IA), the question was a pertinent one. “There are a lot of firms involved in this, and while the engagement and response has differed, overall I think we can say that the VARs have been of value.

“The outcomes have highlighted various things: a reduction in fees for one, as well as stronger scrutiny of fund manager performance,” he said, adding that the demand that funds report more outcomes is undoubtedly drawing more focus to the key issues facing managers.

However, Shiv Taneja, who in his role as founder of the Fund Boards Council has looked at more than 210 reports from year one, pointed out that more than 50% scored poorly on multiple factors. These include visibility and board accountability, as well as the assessment of value itself.

“So I’d characterise it overall as variable: those that did it well did it very well; but the vast majority of firms are still getting to grips with it,” he concluded. 

“Clearly the first year focused on governance, but we can expect to see more focus from the FCA on whether the independent directors are simply kicking the tyres or whether they have teeth.” 

Chris Day, Assistant Director Funds Regulation and Governance, NatWest TDS

And Taneja’s view was mirrored by Nick Emmins, senior associate at Cooper Wood & Associates and non-executive director at Lazard Fund Managers, who said that since firms were still on a pathway of discovery on the adoption of VARs into their culture, judgement should be tempered by the steep learning curve some have had to scale. 

“Certainly some investors will have benefited, but visibility hasn’t been great,” Emmins said. “And given that a majority of managers have scored their funds as fair value, that suggests that there is more work to be done.”

Looking ahead

But it’s clear that the regulators are learning as the new regime beds in, and are likely to broaden out their oversight of funds. “There is naturally a focus on the VAR side of this,” said Capper, “But it’s really just the tip of the iceberg as the FCA [Financial Conduct Authority] looks to get under the bonnet of the governance side of things, so it’s really important that firms are prepared for that with their audit records and decision-making process when the FCA comes knocking.”

For some observers, the next natural step in the evolution of this exercise would be to introduce some clearer prescriptive steps to guide firms towards what should and shouldn’t be done. That, though, Taneja believes, would be a mistake.

“There are some good arguments for more prescription, but it misses the point of the exercise: it’s about understanding what processes need to happen at board level and how that is then translated down into the organisation. And that’s an exercise that each organisation must do for itself, because if there’s too much prescription then it will become a box-ticking exercise, and I think the FCA is determined to avoid that.”

However Taneja conceded that comparability and consistency were key, in order to allow investors to make comparisons in the same way they might use a set of accounts.

Going the extra mile

Given that, the challenge, according to Nick Emmins, was to move beyond the boilerplate: “It’s worth pointing out that most managers have – so far at least – stuck to the seven criteria that were initially laid out, and not really been very creative in the ways they address and assess value,” he said.

“And it’s worth thinking about that across different industries, so there’s a big philosophical piece that managers need to get their head around, and it would be retrograde if we ended up with something that was too prescriptive.”

Getting the balance between establishing comparability and allowing managers to explore deeper the notion of value right won’t be easy, as Chris Day, assistant director, funds regulation and governance at NatWest TDS pointed out.

“Ultimately if these are to be read by investors then some element of comparability has to be included,” he said. “And whether that’s developed through FCA guidance or something else, it probably would help.”

Enlightened thinking

Looking ahead, host Peter Christmas, director, client management at NatWest TDS, was keen to focus on the key trends that might emerge in the coming year. For some, the emergence of environmental, social and governance (ESG) as a specific element in fund performance would lead the way. For the IA’s Peter Capper, following a year of bedding-in processes, the focus will likely shift to improving the clarity of the reports as well as adding depth.

“I think moving beyond the seven criteria, we might see more firms looking at their value offering in terms of what they’re bringing out to the market and add criteria, and we may see that taken to the next stage.”

A Funds Boards Council survey showed that 42% of respondents said they expected no change in the coming year. But a deeper look at the data, Taneja explained, showed that there was a growing appetite for the assessment of value to be an ongoing iterative process, and not an annual exercise.

“In other words, how do boards deal with the output of the value assessment in their day- to-day operations? I think in that respect we’ll see some substantive changes in that area, although they might not be immediately visible.”

More change to come

Evolution, then, not revolution as the industry’s response to regime continues. “Certainly firms will have been taking on board feedback,” said Chris Day, who also pointed out the role of independent directors would likely come to the fore.

“Clearly the first year focused on governance, but we can expect to see more focus from the FCA on whether the independent directors are simply kicking the tyres or whether they have teeth.”

Finally, the importance of ESG was once again highlighted. And Chris Day was clear in his belief that more change was coming down the pipe. “We’ve got SFDR [sustainable finance disclosure regulation] coming in March, and then UK managers will have to deliver TCFD [Task Force on Climate-related Financial Disclosures] reports, so we’re definitely going to see greater disclosure demands soon. And it’s challenging to know what to include, because whatever you add you must monitor.”

By Christian Doherty