Fund Governance Insights

AFM replacement: Resilience amid uncertainty

4 minute read time

The FCA has previously observed depositaries play an important role in preventing harm to investors in funds and the current impact of Covid-19 has made this responsibility more important than ever.

Over the past 14 months the FCA has reviewed how depositaries monitor and identify issues relating to an AFM, and the circumstances in which they would replace an AFM, to ensure a fund’s governance and operations continue if the AFM is no longer able to act in its role as set out in COLL 6.5 of the FCA Handbook. The most likely scenario where a depositary may replace an AFM is as a result of insolvency.

For a number of firms, including NatWest Trustee and Depository Services, the discussions led to the drafting of ‘playbooks’ which set out the people, processes and timeframes for stepping in, as well as the triggers for such a scenario.

In May the FCA issued a feedback letter to depositaries, setting out the overarching findings from its meetings over the past year, and providing recommendations for how to ensure processes and plans were robust enough to enable smooth stepping-in if required.

Key points from the FCA’s feedback letter

There were a number of feedback points in the FCA’s letter to depositaries, which indicate how the regulator expects procedures to evolve.

  • In the letter, the FCA sets out the financial metrics that depositaries should monitor as part of the ‘triggers’ and indicators for acting under COLL 6.5. Triggers should be incorporated into governance processes and management information. While depositaries are not required to conduct ongoing financial monitoring of AFMs, they should be aware of any causes for concern and have a duty to inform the FCA in such a scenario.
  • Emphasis is placed on the need for good governance practices including agile governance forums with clear decision makers and terms of reference. This includes having documented procedures (such as the ‘playbook’) which set out steps, stakeholders, scalability, timelines and how to operationalise these.
  • Resourcing constraints and pressures should be understood, including potential reliance on third parties. Depositaries are expected to take steps to ensure third parties can act quickly when needed and that there are no conflicts of interest.
  • Alternatives to suspension should also be considered – it should not be taken as the default response in all scenarios.

The FCA required depositaries to respond within 30 days of receipt of the letter.

NatWest Trustee and Depositary Services view

NWTDS’ senior leadership team reviewed the letter and responded setting out our next steps, with a focus on our key priorities of investor protection and strong governance.

Whilst we have a robust governance process in place in light of the detailed feedback, we will review client agreements and strengthen some provisions to enable us to improve our oversight of the AFM’s financial health. We also committed to conduct a review of our playbook. We will be engaging with clients in H2 to talk through what this specifically means for you but if you have any questions then please contact your relationship manager.

In summary

The Covid-19 pandemic has led many across the industry to take a fresh look at their procedures, to gain assurance that they are robust. The discussions on COLL 6.5 are an example of how depositaries and the FCA are working together to ensure that the best interests of investors are enshrined within processes so that the focus is always on investor protection, strong governance and the stability of the market.

By Peter Flynn

Associate, Funds Regulation & Governance