![Regulatory Considerations
Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 24
AIFMD – Governing Body Obligations
• Article 60: An AIFM shall ensure that the governing body or the supervisory function, if any, receives on a regular
basis written reports on [matters of compliance, internal audit and risk management indicating in particular
whether appropriate remedial measures have been taken in the event of any deficiencies]](https://image.slidesharecdn.com/fundmanager-directortrainingslides-180702092952/85/Fund-manager-director-training-slides-24-320.jpg)
Fund manager - director training slides
- 1. Directors of AIFMs Training April 2018 Mike Booth Regulatory Director
- 2. Key requirements for Directors of AIFMs Broadly there are four key areas of focus… Companies Act Duties: General duties that apply to Directors of all UK private companies Controlled Function Obligations: Specific obligations for FCA regulated businesses INEDs: Additional considerations for Independent Non- Executive Directors (but also relevant Executive Directors) Assisting with general board responsibilities: Appreciation of regulatory expectations for the AIFM as a whole is important Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 2
- 3. Companies Act Duties General duties that apply to all Directors of UK private companies
- 4. Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 4 Directors’ Duties Outline To act in a way which the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. Directors should have regard to the: Likely consequences of any decision in the long term Interests of the company’s employees Need to foster company’s business relationships with suppliers, customers and others Impact of the company’s operations on community and environment Desirability of company maintaining a reputation for high standards of business conduct Need to act fairly as between members of the company Combination of common law and equitable principles and statutory duties set out in the Companies Act 2006
- 5. Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 5 Directors’ Duties Outline Duties under the Companies Act 2006 (continued) To act within powers To exercise reasonable care, skill and diligence To avoid conflicts of interest To declare interests in proposed and existing transactions Including consideration of group interests Not to accept benefits from third parties
- 6. Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 6 Directors’ Duties Outline Satisfactory paper trail to pass the “benefit of hindsight” test Preparation of paperwork demonstrating consideration of all relevant factors Clear internal processes showing challenge/input at appropriate stages – understanding of accountability Decisions appropriately minuted, whether at board level or investor committee level – showing appropriate challenge and testing What does this mean in practice?
- 7. Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 7 Elements of corporate governance Leadership Effectiveness Accountability Remuneration Relationship with shareholders / stakeholders 1. Effective board 2. Division of responsibilities 3. Effective chairman 4. Challenging non-execs 1. Balance of skills 2. Procedure for appointing directors 3. Directors have sufficient time 4. Training for new directors 5. Management information 6. Self evaluation 1. Fair presentation of financial performance to shareholders 2. Determine material risks 3. Established system of internal control 1. Remuneration should be designed to promote the long term success of the company 2. A formal and transparent procedures for setting executive remuneration 1. There should be a dialogue with shareholders based on the mutual understanding of objectives. 2. The board should use general meetings to communicate with investors “Corporate governance is the structure through which an organisation is directed, controlled and held accountable. It defines a framework of rights, responsibilities, procedures and relationships amongst the various stakeholders of an organisation, including its directors, managers, shareholders and regulators. The board of directors – or equivalent governing body - is at the heart of any framework of corporate governance, and is arguably the most important mechanism for ensuring that the organisation makes effective decisions which are consistent with its ultimate objectives and mission” IoD
- 8. Controlled Function Obligations Specific obligations for FCA regulated business
- 9. Statement of principles Application to CF1 - Directors Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 9 1. An approved person must act with integrity in carrying out his accountable 2. An approved person must act with due skill, care and diligence in carrying out his accountable functions 3. An approved person must observe proper standards of market conduct in carrying out his accountable functions 4. An approved person must deal with the FCA, the PRA and other regulators in an open and cooperative way and must disclose appropriately any information of which the FCA or the PRA would reasonably expect notice
- 10. Statement of principles Application to CF1 - Directors Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 10 5. An approved person performing an accountable higher management function must take reasonable steps to ensure that the business of the firm for which they are responsible in their accountable function is organised so that it can be controlled effectively 6. An approved person performing an accountable higher management function must exercise due skill, care and diligence in managing the business of the firm for which they are responsible in their accountable function 7. An approved person performing an accountable higher management function must take reasonable steps to ensure that the business of the firm for which they are responsible in their accountable function complies with the relevant requirements and standards of the regulatory system
- 11. NEDs Additional considerations for Independent Non-Executive Directors (but also relevant for Executive Directors)
- 12. NEDs Vs Executive Directors Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 12 Non-Executive “Creative criticism, independent judgement, challenge, advice, right of access to information” “Executing the function they have been given subject to any limitations of authority conveyed by the board”
- 13. Key considerations for NEDs Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 13 Business proposals The firm’s culture Right information The firm has identified risks Appropriate actions are in place Identification and escalation of issues The business learns from identified issues Business proposals are aligned with the firm’s strategy and are within its stated risk appetite Encourage the Board to discuss customer expectations and how the firm deliver against them Challenge the Board to consider the products and services it delivers to customers and whether they are appropriate for the target market Be comfortable with the Board’s involvement in new product development
- 14. Key considerations for NEDs Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 14 Business proposals The firm’s culture Right information The firm has identified risks Appropriate actions are in place Identification and escalation of issues The business learns from identified issues The firm’s culture is such that it delivers good behaviours and outcomes, both prudentially and for customers Encourage the Board to embed and maintain a culture that supports an appropriate degree of protection for customers, taking into account factors such as the firm’s business plan, risk appetite, remuneration mechanisms and identified internal and external risks Identify what prompts this particular discussion – e.g. change of management, change of strategy and crystallised risk Challenge the Board to provide continuing oversight of the firm’s culture particularly in times of change Challenge the Board to lead the executive on culture and values With the Board, monitor against the values that it has set
- 15. Key considerations for NEDs Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 15 Business proposals a The firm’s culture Right information The firm has identified risks Appropriate actions are in place Identification and escalation of issues The business learns from identified issues The NEDs have the right information to enable them to make robust decisions and if they feel they do not, then they should ask for it Challenge the information the Board receives on conduct risk Ensure the information is sufficient to support decision making Encourage the Board to challenge the information it receives Challenge the Board on how the information is used
- 16. Key considerations for NEDs Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 16 Business proposals a The firm’s culture Right information The firm has identified risks Appropriate actions are in place Identification and escalation of issues The business learns from identified issues The firm has identified risks to investors Challenge the Board to proactively consider the conduct risks the firm might be giving rise to Be confident in how the Board identifies, mitigates and monitors its conduct risk Be comfortable with the level of priority the firm gives to conduct risk
- 17. Key considerations for NEDs Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 17 Business proposals a The firm’s culture Right information The firm has identified risks Appropriate actions are in place Identification and escalation of issues The business learns from identified issues Appropriate actions are in place to mitigate and monitor such risks Be comfortable that management information captures the key retail conduct risks within the firm Challenge that actions are put in place, where possible, to prevent the crystallisation of risk Be confident there is clear accountability for mitigating identified risks
- 18. Key considerations for NEDs Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 18 Business proposals a The firm’s culture Right information The firm has identified risks Appropriate actions are in place Identification and escalation of issues The business learns from identified issues Supports the identification and escalation of issues when they go wrong and ensures appropriate resolution Encourage the Board to create an open and collaborative working environment Challenge the Board to focus on seeking solutions rather than attributing blame Be comfortable that the Board ensures resolution is fair to all affected customers, i.e. not just those who have complained Challenge the Board to monitor whether the recommended actions have led to the appropriate outcomes for customers
- 19. Key considerations for NEDs Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 19 Business proposals a The firm’s culture Right information The firm has identified risks Appropriate actions are in place Identification and escalation of issues The business learns from identified issues The business learns from identified issues and draws out the wider implications Challenge the Board to identify the root causes of issues to help prevent them happening in the future Where things go wrong, challenge the Board not to solely focus on the area where the issue originated, but give consideration to whether it may be apparent in other areas of the business
- 20. Assisting with general board responsibilities Appreciation of regulatory expectations for the AIFM as a whole is important
- 21. Regulatory Considerations Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 21 • Recital 44: The governing body should possess sufficient knowledge, skills and experience to exercise their tasks, in particular to understand the risks associated with the activity of the AIFM. In line with the Commission’s Green Paper on corporate governance in the financial sector. • Article 21: The governing body of the AIFM possesses adequate collective knowledge, skills and experience to be able to understand the AIFM’s activities, in particular the main risks involved in those activities and the assets in which the AIF is invested • Article 21: The members of the governing body commit sufficient time to properly perform their functions in the AIFM • Article 21: Each member of the governing body acts with honesty, integrity and independence of mind • Article 21: The AIFM devotes adequate resources to the induction and training of members of the governing body AIFMD – Governing Body Obligations
- 22. Regulatory Considerations Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 22 AIFMD – Governing Body Obligations • Article 39: An AIFM shall establish and maintain a permanent risk management function that shall…monitor compliance with the risk limits set in accordance with Article 44 and notify the AIFM’s governing body and, where it exists, the AIFM’s supervisory function in a timely manner when it considers the AIF’s risk profile inconsistent with these limits or sees a material risk that the risk profile will become inconsistent with these limits. • Article 39: ..provide the following regular updates to the governing body of the AIFM and where it exists the AIFM’s supervisory function at a frequency which is in accordance with the nature, scale and complexity of the AIF or the AIFM’s activities; • the consistency between and compliance with the risk limits set in accordance with Article 44 and the risk profile of the AIF as disclosed to investors in accordance with Article 23(4)(c) of Directive 2011/61/EU; • the adequacy and effectiveness of the risk management process, indicating in particular whether appropriate remedial measures have been or will be taken in the event of any actual or anticipated deficiencies.
- 23. Regulatory Considerations Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 23 AIFMD – Governing Body Obligations • Article 42: The functional and hierarchical separation of the risk management function in accordance with paragraph 1 shall be ensured throughout the whole hierarchical structure of the AIFM, up to its governing body. It shall be reviewed by the governing body and, where it exists, the supervisory function of the AIFM • Article 43: The risk management function is represented in the governing body or the supervisory function, where it has been established, at least with the same authority as the portfolio management function. • Article 43: The governing body of the AIFM and, where it exists, the supervisory function shall establish the safeguards against conflicts of interest… • Article 44: …risk limits…approved by the governing body
- 24. Regulatory Considerations Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 24 AIFMD – Governing Body Obligations • Article 60: An AIFM shall ensure that the governing body or the supervisory function, if any, receives on a regular basis written reports on [matters of compliance, internal audit and risk management indicating in particular whether appropriate remedial measures have been taken in the event of any deficiencies]
- 25. FCA Hot Topics Eversheds Sutherland | Training Slides - Director Responsibilities | April 2018 25 Value for Money: A focus on fund costs, including implicit trading costs and assessment of performance to peer benchmarks Conflicts: Managing conflicts of interest between investors, reviewing cross trades, redemption terms, etc Market integrity: Ensuring trading strategy is not contributing to market integrity issues Fund Objectives: Are they clear, what about closet trackers? Data protection: A topic contained in their approach to supervision document release March 2018 Cyber Security: A topic contained in their approach to supervision document release March 2018 Risk Management: How is the firm ensuring that investors are only taking on the risks they expect Oversight of services providers: Ensuing business continuity and service quality. Governance: A continued topic
- 26. eversheds-sutherland.com This information pack is intended as a guide only. Whilst the information it contains is believed to be correct, it is not a substitute for appropriate legal advice. Eversheds Sutherland (International) LLP can take no responsibility for actions taken based on the information contained in this pack. © Eversheds Sutherland 2017. All rights reserved.