IA NED Forum Resource Library

Stewardship
Investment managers want companies to generate sustainable value over the long term for their clients. The activities undertaken by investment managers to promote the long-term success of companies are collectively known as ‘stewardship’. 

The Financial Reporting Council (FRC), responsible for the UK’s Stewardship Code as well as the UK’s Corporate Governance Code, defines stewardship as “the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society”.

The FRC's UK Stewardship Code 2020 sets high stewardship standards for asset owners and asset managers, and for the service providers that support them. The Code comprises a set of 'apply and explain' principles for investment managers and asset owners, and a separate set of principles for service providers. The Code does not prescribe a single approach to effective stewardship, but instead allows organisations to meet the expectations in a manner that is aligned with their own business model and strategy. Please find some more information here.

The IA actively works to assist our members’ stewardship activities and promote the excellent stewardship work already underway across the industry. The IA is currently nearing the end of a programme of works designed to drive forward best-practice stewardship across the industry. This included a number of publications to help members in continuing to promote best practice stewardship, including:

• Asset Management Taskforce Stewardship Working Group: Investing With Purpose Report. This report provides a blueprint for integrating stewardship into the investment process and seeks to cement the UK as a global centre of excellence in stewardship practice. 
• IA’s Good Stewardship Guide 2021: This serves as an introductory guide to stewardship. 
• Improving: Fixed Income Stewardship: This guidance aims to outline the importance of stewardship in corporate debt to investment managers, their clients, regulators, and companies.

In addition, we will shortly be publishing guidance for institutional investors on increasing the effectiveness of requisitioned resolutions as an escalation tool.

In addition to the above, the IA responds to policy consultations to provide key industry insights and help shape the corporate governance and stewardship reform agenda. All of our consultation responses are included on the IA's Responses and Representations page.

More information can be found on the IA’s Stewardship and Corporate Governance page. 

Corporate Governance

To assist our members’ stewardship activities, the IA produces guidelines for listed companies on corporate governance, setting out investor expectations of their behaviour across a range of issues including executive remuneration, long term reporting, and share capital management. 
The FRC's UK Corporate Governance Code was revised in July 2018. At the heart of the Code is an updated set of Principles that emphasise the value of good corporate governance to long-term sustainable success. The Code does not set out a rigid set of rules; instead it offers flexibility through the application of the Principles. Please find some more information here.

The IA’s guidance is headlined by our annual Shareholder Priorities for Listed Companies, which outlines the four areas that our members asked us to prioritise to drive long term value: responding to climate change, audit quality, stakeholder engagement and diversity. These four issues present an opportunity to better the UK’s listed market; making it more diverse, future-proof, holistic and resilient. 
Other guidance for listed companies includes: 

• Guidelines on corporate governance and share capital management.
• Principles of Remuneration.
• Expectations for Executive Remuneration During the Pandemic.

The IA’s guidance is supported by our in-house corporate governance experts as part of our Institutional Voting Information Service (IVIS). IVIS is one of the UK’s leading providers of corporate governance research. 

Our members have shown that taking action on corporate governance issues can achieve positive and lasting results, improving company behaviour for the better. In 2020, we supported our members by focusing on three key issues they identified as critical for better run companies: diversity, executive pensions and quality of audit. The IA was pleased with the progress companies had made against these priorities in 2020, especially on diversity and executive pensions.

It continues to be widely acknowledged, by both investment management firms and the regulator, that culture has a real impact on a company’s long-term reputation and sustainability. It is the underlying culture that influences the way people think, act and make decisions, which in turn shapes a firm’s ability to attract and retain the best talent, develop a truly inclusive culture, or future proof more widely in an ever-evolving climate.

Practically, we seek to support members on their culture journeys through a series of related webinars, briefings and ad hoc papers. Two of our main outputs in this space over the last few years however have been the IA’s Culture Framework and our annual Culture in Investment Management Forums.

• IA Culture in Investment Management Forum will be taking place on the 30 November, 12:00-18:00pm. This will be an in person event hosted by Schroders, 1 London Wall Place, London EC2Y 5AU. This year’s agenda will seek to cover:
  • An update on the current trends in cultural transformation, including the role of purpose and strategy, values and psychological safety
  • The view from the regulator on the industry’s culture agenda
  • Interactive sessions to bring measuring and sustaining a healthy culture to life
  • A discussion on the current war for talent
  • An understanding of the importance and impact of data collection, as well as best practices
  • An opportunity to discuss and debate approaches to future working patterns and its impact on workplace culture
  • To view the full agenda and register for this event, please visit the IA’s website here.
• Culture Framework – Fourth Edition (produced in partnership with Latham & Watkins). The Framework is a non-prescriptive resource which seeks to help bridge the theory/ practice divide by offering a practical toolkit, informed (amongst other things) by recent insights, trends and real-life case studies – from which firms can draw, informing their own approach to culture change. The Framework can be accessed here. 

Due to the impact and influence of culture on the way an organisation operates and interacts with consumers, it also underpins much of the wider work the IA does. Please see the following expert pages for more information:

• Culture expert page
• HR policy expert page
• Corporate governance expert page

1. DP21/2: Diversity and inclusion in the financial sector – working together to drive change

Last July, the FCA, PRA and Bank of England published a joint Discussion Paper on how they can accelerate the pace of meaningful change on D&I in the sector.

D&I has increasingly become a key area of focus for UK regulators. Whilst DP21/2 acknowledges the progress made by the industry on D&I, it again emphasises the need to drive this agenda forward, with the regulators' support, in order to 'accelerate the pace of meaningful change' and 'create truly diverse and inclusive organisations that meet the diverse needs of those we serve'.

The DP places a specific focus on the importance of data and measuring and reporting on progress. In this section, the regulators set out suggestions for developing metrics to monitor this. A number of wider possible policy initiatives which aim to drive and support change are also outlined. These include:

• regular reporting of diversity data to the regulators;
• the use of targets for representation;
• measures to make senior leaders directly accountable for D&I in their firms;
• linking remuneration to D&I metrics;
• having a D&I policy, training on D&I and undertaking a diversity audit; and
• the regulators’ approach to non-financial misconduct, and considering D&I in Senior Managers approvals and assessment of Threshold Conditions.

The IA responded to the DP ahead of the September 2021 deadline, aggregating members’ views into an industry position. The IA’s response can be found here.

Since then, at the end of 2021, the regulators published a voluntary data collection survey which was circulated to all FCA and PRA dual-regulated firms, a sample of FCA solo-regulated firms, and a selection of Financial Market Infrastructures. The purpose of this survey was to aid the regulators in understanding current levels of diversity within firms, what categories firms were currently collecting data on, and what strategies and plans they had in place to collect further D&I data in the future, in order to inform the development of any future policy developments.

In January 2022, the regulators published their cost benefit analysis survey (CBA), which seeks to support them in estimating the costs firms may incur to implement and operate the policy concepts being considered. A subsequent CBA was then circulated in June to reflect their more developed thinking, which included an updated indicative policy summary and simplified survey questions to reflect their latest proposed approach.

The next phase will be the publication of their Consultation Paper, which we are now expecting before the end of 2022.

2. Inclusion research project with the University of Cambridge Judge Business School

The IA is working with the University of Cambridge Judge Business School, as facilitated by Invesco, on an industry-leading piece of collaborative research which explores how eight different indicators of diversity - gender, sexual orientation, socio-economic status, ability (mental and physical), race and ethnicity, age, religion, and culture – correlate with employee wellbeing, satisfaction, and team performance. The findings of this research will be used to develop suggestions to improve the structural, cultural and strategic factors, such as leadership, strategy, incentives or culture, which can foster this holistic view of inclusion. This is due to be published in Q1 2023.

3. Mental Health Hub 

The IA’s Mental Health Hub is a member-only benefit which was published in May 2021 to coincide with Mental Health Awareness Week. The Hub, which has since been updated, acts as a convening platform, sign-posting members to practical resources, tips and advice, and external organisations which provide mental health and wellbeing support. We very much hope that this will be a valuable tool for the members, supporting you all in ensuring that the industry is a safe and healthy environment.

4. IA representation on the socio-economic taskforce

The IA continue to support the work of the socio-economic diversity taskforce, which was commissioned by HM Treasury and the Department for Business, Energy & Industrial Strategy, and is led by the City of London Corporation. This independent taskforce – on which the IA’s CEO, Chris Cummings, sits – seeks to boost socio-economic diversity at senior levels in UK Financial and Professional services. The vision is for equity of progression - where high performance is valued over ‘fit’ and ‘polish’.

5. Investment20/20 (I20/20)

Investment20/20 is the Investment Association’s talent solution and helps drive a forward thinking, responsible and inclusive investment industry where every firm attracts, develops and retains talented people from all backgrounds.  

Driven by a mission to achieve systemic change across the industry so that all investment management firms hire for potential rather than academic background or experience alone, they have supported over 2,000 young aspiring professionals to start their careers in the industry through their 12 month trainee programme.

Investment20/20 was founded in 2013 by senior investment leaders and is now an award-winning service that became part of the Investment Association in 2018. 

On the 5 July 2021, the IA launched its landmark Future World of Work project. 

This project was born out of the recognition that while the industry continues to navigate the ever-changing environment in which it operates, focus has increasingly been drawn away from solely looking to the here and now, and onto what the future of work will look like.

We now have the opportunity to build on the insights and experiences gained over the last 18 months, reimagine our organisational and workplace structures, and invest in a stronger and more inclusive organisational culture.

To support the industry in doing so, the IA commissioned a series of thought leadership pieces, written by subject matter experts from within and outside the industry, supplemented by a number of member case studies. These seek to support internal discussions and help each firm to determine their own optimal approach by providing non-prescriptive insights on three key areas:

• The Office of the Future
• Working Patterns and practices
• Skills & Behaviours

Importantly, these are underpinned by D&I considerations and the future regulatory environment.

The IA continues to support members on their journeys and will subsequently be expanding their resources in this area.

Non-Executive Directors (NEDs) play a critical role in providing oversight and scrutiny on fund boards. To do this effectively, it is important that NEDs are aware of their additional responsibility to comply with regulatory obligations within the investment management industry – such as the Senior Managers and Certification Regime (SM&CR). SM&CR was extended to the majority of FCA solo-regulated firms on 9 December 2019, including investment managers. The SM&CR sits alongside the statutory and fiduciary duties of directors under UK company law and corporate governance standards. The IA and a number of affiliate members have produced thought leadership pieces to help firms with the implementation of the regime, including SM&CR extension to solo-regulated firms: implications for HR and the impact of SM&CR on asset managers. More information can be found on our dedicated SM&CR Expert Page.

The main objective of the regime is to reduce harm to consumers and strengthen market integrity by setting a new standard of personal conduct for individuals working in financial services. It aims to encourage a culture of staff at all levels taking accountability for their actions, to ensure that firms and staff clearly understand and can demonstrate where responsibility lies.

SM&CR is applied on a proportionate basis and IA member firms will either be defined as Core or Enhanced. 

The responsibilities of a NED of an SM&CR firm

Under SM&CR, the role of a NED is to help develop proposals on strategy and provide effective oversight and challenge to the business. To deliver on these objectives, NEDs will attend and contribute at board and committee meetings and discussions, particularly in the collective decision-making process, including voting, providing input and challenge. NEDs should also make sure they are appropriately and sufficiently informed on relevant matters prior to participation.

The FCA’s Code of Conduct for Staff sourcebook sets out other key roles depending on the specific role that a NED performs, whether under the SM&CR regime or not. It reinforces the standard of care, skill and diligence that the FCA expects to see from a NED - that which would be exercised by any reasonably diligent person with the skills, knowledge and experience expected of someone performing their role.

The FCA’s view of the role of a NED is consistent with the duties of directors included in UK company law and the description of the role of a NED in the UK Corporate Governance Code. However, the FCA recognises that NEDs do not manage a firm’s business in the same way as Executive Directors, and therefore their responsibilities are likely to be more limited.

The Senior Manager Regime for NEDs

Not all NEDs are within scope of the SM&CR, although some do hold Senior Management Functions (SMFs). At Core firms, only NEDs performing the role of the Chair (SMF9) have to obtain pre-approval from the FCA. NEDs at Enhanced firms require pre-approval if they are performing the following SMFs:

• Chair (SMF9)
• Senior Independent Director (SM14)
• Chair of the Risk, Audit, Remuneration and Nominations Committees (where they exist) (SMF10, 11, 12, and 13).

Irrespective of whether the firm is Core or Enhanced, Senior Managers are required to produce a Statement of Responsibilities (SoR) that explains what activities they are responsible and accountable for, including the SMF’s prescribed responsibilities. The SoR must be submitted to the FCA when applying for regulatory pre-approval and the document should be updated when a significant change takes place.

For more guidance on the role and responsibilities of a NED of an SM&CR firm, please see the FCA’s Code of Conduct for Staff sourcebook (COCON) and the FCA’s SM&CR guide for solo-regulated firms.

Prescribed responsibilities

The allocation of Prescribed Responsibilities (PRs) is a requirement under the Senior Managers Regime. A concise explanation of each PR, can be found in SYSC 24 of the FCA Handbook.

The FCA would normally expect certain PRs to be allocated to a NED, or a partner who does not have management responsibilities, to provide independent oversight. For both Core and Enhanced firms,  this includes the following PR – Responsibility for an Authorised Fund Manager’s s value for money assessments, independent director representation and acting in the investor’s best interest. The FCA have confirmed that, where a Senior Manager performs the SMF9 Chair role, this PR should be allocated to this Senior Manager. This PR originates from the recommendations of the FCA’s Asset Management Market Study, discussed in FCA CP17/18 and PS18/08, and directly relates back to the founding of the IA iNED Club.

Fitness and Propriety for NEDs

Another key feature of SM&CR is to reinforce that firms need to take responsibility for their staff being fit and proper to do their jobs. This applies to anyone performing a SMF, as well as NEDs who are not Senior Managers. Once someone is in such a role, firms must assess them on an ongoing basis, and at least once a year.

The FCA’s FIT Handbook sets out detailed guidance about what firms should consider when assessing a person’s fitness and propriety. This includes:

• Honesty, integrity and reputation;
• Competence and capability, including whether the person satisfies any relevant FCA training and competence requirements; and
• Financial soundness.

They are also subject to criminal records checks and regulatory reference requirements. 

More information can be found in the IA/Worksmart thought leadership paper on the Certification Regime. 

The Conduct Rules for NEDs

The Conduct Rules are a set of enforceable rules that establish basic standards of good personal conduct, against which people can be held accountable. They help to shape a firm’s culture, standards and policies as a whole and promote positive behaviours to reduce harm (Chapter 11 of the FCA’s SM&CR guide for solo-regulated firms).

The Conduct Rules apply to all NEDs and they are required to be trained on how the rules apply to them in their roles. These are as follows:

• To act with integrity;
• To act with due care, skill and diligence;
• To be open and cooperative with the FCA, the PRA and other regulators;
• To pay due regard to the interests of customers and treat them fairly; and
• To observe proper standards of market conduct.

NEDs also have to comply with the Senior Manager Conduct Rule 4. This means they must appropriately disclose any information of which the FCA or the PRA would reasonably be expected to know.

Please see the IA/Linklaters thought leadership paper on the Conduct Rules for investment managers for more information.

Training

The IA is hosting a series of SM&CR online briefings, webinars, training sessions and conferences to support members in effectively implementing the regime. Please see our schedule here and our previous SM&CR briefings and webinars here. 

Since September 2019, the Board of each AFM has been required to perform an annual assessment for each fund of whether the charges paid by the investors in the fund are justified by the value the fund has delivered to investors. Each AFM must issue an annual report to investors detailing the value assessment undertaken, the conclusions of this and any remedial action the AFM board has identified as being needed to address instances of poor value. AFM boards have also been required to appoint two iNEDs since then, and the FCA regards their role in the value assessment as critical, and expects them to represent the best interests of investors in the fund and challenge the board on the value the funds are offering.

The FCA also established a Prescribed Responsibility under the SM&CR for value assessments, which applies to the Chair of the governing body or, in exceptional cases, to another senior member of the board. This individual must ensure that an assessment of value is carried out, there is independent director representation on the AFM board and that the AFM acts in the best interests of investors. The IA has produced a short two-page summary explaining the basic requirements of the value assessment. The value assessment is a significant undertaking, and requires iNEDs to have a strong knowledge of how funds work, the regulatory requirements, the AFM’s business and fund range. INEDs and aspiring iNEDs should therefore be prepared to devote a substantial time to learning and understanding the businesses of the AFMs they will be working with, engaging in the value assessment process and undertaking training on improving their knowledge of the funds industry where required. The IA offers a comprehensive suite of practical training courses that can be found here.

Following the first cohort of published value assessment reports, the FCA reviewed the processes used by a number of AFMs in their value assessments, and recently published its findings. The FCA identified a number of improvements needed to the value assessments, and also explained that it expected more effective challenge from iNEDs than it saw in some cases.

The IA has also published an analysis report on assessment of value reports issued in 2020. The report outlines what we have observed in industry practice in the first year. Based on this analysis, we highlight some of the approaches the IA believes have worked well in light of the FCA’s objectives for the assessment of value, and which firms may wish to consider when assessing their approach to future reports. This should by no means be considered a comprehensive list of recommendations, or a safe harbour standard. Such standards can only be issued by the FCA.

Recommendations are made around the accessibility and location of reports, setting out a statement or a summary comment about the year's value assessment, using graphics and summaries to make reports easier to follow, in addition to recommendations on presenting the findings relating to each of the seven minimum criteria set by the FCA.

The IA anticipates the process to be one of continuous learning and improvement over the next few years, as AFM boards, in partnership with their independent directors, grow and refine their understanding and familiarity with the concepts and processes involved in the assessment of value. We therefore encourage iNEDs to read the FCA’s findings, the analysis and recommendations contained in the IA’s report, and publications on the value assessment from other bodies as they consider further development of their approach to the assessment of value.

In January 2022, the IA published member guidance and FAQs on the value assessment and reporting requirements for UK authorised fund managers. 

More detail on the value assessment, and the guidance developed by the IA for its members, is available on our members only Value Assessment and Reporting (PS/18/8) page. 

Regulators are increasingly focusing on the resilience of firms. In fact, regulators now consider a firm's ability to continue providing services during times of disruption and volatility as important as its financial reserve capabilities and operational resilience has remained a consistent priority on the FCA’s annual work plan.

The term ‘operational resilience’ builds on familiar concepts of ‘business continuity’ and ‘operational risk management’, introducing new requirements and expectations for firms to:

• identify their important business services that, if disrupted, could cause harm to consumers or market integrity, threaten the viability of firms or cause instability in the financial system.
• set impact tolerances for each important business service, which would quantify the maximum tolerable level of disruption they would tolerate.
• identify and map the people, processes, technology, facilities and information that support their important business services (including those of their suppliers).
• take actions to be able to remain within their impact tolerances through a range of severe but plausible disruption scenarios including developing a testing plan and carrying out scenario testing.
• conduct lessons learnt exercises to identify, prioritise, and invest in your ability to respond and recover from disruptions as effectively as possible.
• develop internal and external communications plans for when important business services are disrupted.
• maintain an updated self-assessment document detailing how the firm has assessed its compliance with the regulatory requirements.

Through this stronger regulatory approach, the UK regulators aim to enhance firms’ ability to withstand, absorb and recover from disruptive operational incidents. The initiative has the end consumer of business services in mind, and assumes that disruption will happen, requiring firms to plan for disruptive events, as well as seeking to prevent them.

In 2018 and 2019, the Bank of England (BoE), the Prudential Regulation Authority (PRA) and the FCA published a joint discussion paper, and subsequent consultation paper. The FCA has since published its policy statement, and the BoE, PRA, and the FCA, have released a shared policy summary on the requirements to strengthen operational resilience in the financial services sector.

IA's work

The IA has a number of workstreams in this area, and has issued multiple publications representing the outputs of various working groups formed to address specific elements of the operational resilience rules. These publications are intended to support members with their operational resilience arrangements. Please see below:

• Self-Assessment Guidance
• Scenario Testing: Severe but Plausible
• Impact tolerances: Appetite for Disruption. 
• Effective Governance of Operational Resilience. 
• Member Guidance: Important Business Services. 
• Business Services & Beyond. 

Please find some more information on the IA’s Operational Resilience expert page. 

A week hardly goes by without reports of a cyber-attack affecting businesses. The importance of building a firm’s cyber resilience cannot be understated and firms should take appropriate measures to protect their firms from cyber-attacks.

To aid members in this area, the IA Cyber Resilience Committee meets quarterly to discuss common challenges and areas of interest. Do look out for the cyber insights produced after each meeting summarising the developments in the threat landscape and how members are tackling these challenges.

Board engagement and governance

In May 2021, the IA issued two pieces of guidance to support members in the area of cyber board engagement and governance, updating existing IA guidance in this area. Effective board engagement with cyber security remains crucial to building resilience, a fact also recognised by the regulators. To aid members in this field, our first report updates our previous guidance on Board Engagement and Governance, offering considerations to help boards and management to improve their understanding and management of cyber risks. In conjunction, we have also published a supplementary Resource Overview highlighting additional readily available guidance for boards which members can refer to when considering cyber risks.

Incident Response Planning

Cyber incident management and response is a key tool to have in a firm’s armoury. In October 2021, the IA published guidance to offer considerations for members to take away and build their own incident response plans.For more detail on the IA’s work supporting members to build their cyber resilience, please see our dedicated expert page. 

There has never been a greater focus on how well investment management firms deliver for their customers and for the wider economy. That to us means making investments that are a driving force for change – for our clients, their beneficiaries and the world we all live in. 

We know that we can’t achieve this alone. We also know that responsible investment is no longer a special product, or even an option. It’s a necessity, which our member firms deliver in a diverse and ever-evolving way. The greater the number of investors that adopt this perspective, the faster positive change will happen. 

IA’s work 

The IA has released the following publications to help members in this space:

• IA Position on Climate Change (July 2022): The IA’s position lays out the investment management industry’s unwavering support for the Paris Agreement goal to limit global warming to well below 2°C, and preferably to 1.5°C, compared to pre-industrial levels.
• IA Climate Change Action Plan (July 2022): The action plan outlines the commitments the investment management industry will take to support the transition to a lower carbon global economy. This will be reviewed annually.
• How Risk and Compliance Functions Can Support the Net Zero Transition (July 2022): Regulators, supervisors, and wider stakeholders increasingly expect investment managers to develop, disclose and execute credible net zero transition plans. As part of this, Risk and Compliance functions will have an important role to support their firm in the transition. This joint report from the IA and Deloitte considers regulatory developments on transition plans and a suggested list of actions so Risk and Compliance functions can support their firms.
• IA Guidance on the FCA guiding principles on ESG and sustainable investment funds (September 2021): The purpose of this document is to help members implement the Guiding Principles and ensure more consistent customer communications. We do this by providing commentary on each Guiding Principle, as well as some fictitious specimen funds, which we have annotated to explain how the Guiding Principles may apply in practice. 
• IA Responsible Investment Framework (November 2019): The IA framework categorises, and provides standard definitions for, the different components of responsible investment. 

More information can be found on the IA’s Sustainable and Responsible Investment page.