U.K. Fund Managers Face Broader Guidelines on Transparency

(Bloomberg) -- A pair of U.K. regulators is demanding that asset managers change the way they interact with investors under new rules that require funds to provide more information on their business culture.

A key difference in the updated stewardship code from the Financial Reporting Council is that asset managers will have to report what they’ve actually done, rather than just their policies on stewardship. The effectiveness of the current rules is unknown, nine years after the industry first signed up.

“It’s definitely more grit in the system," David Styles, director of corporate governance at the FRC, said in an interview. “It should make more transparent exactly what’s being done.”

Complementing the plan, the Financial Conduct Authority proposed rules that would require asset managers and life insurers to disclose more on how they monitor and engage with companies. Any firm that chooses not to comply with the new guidelines would need to publicly explain why, according to the FCA’s proposal. Currently, the financial-services regulator only requires firms to disclose the nature of their commitment to the guidelines. The two agencies also released a joint discussion paper about the importance of effective stewardship.

According to the audit watchdog, stewardship activities include monitoring assets and service providers, engaging issuers and holding them to account on material issues and publicly reporting on the outcomes of these activities. The revision of the guidelines comes after a review released last year called for the FRC to be replaced. Other changes to the code include a requirement that signatories consider environmental and social material risks as well as an expansion of reporting beyond equities.

The FRC is trying to prove its value after an independent review released by the British government in December criticized the regulator’s guidelines and suggested it be replaced. The review noted that the FRC’s stewardship code on engagement between investors and companies should focus on outcomes.

The FRC will accept submissions on the update until March 29 before a final version is released in the following months. The FCA will accept comments until March 27.

While Styles said the new policies will provide additional bite, it will be hard to measure its overall impact. The FRC hasn’t studied the code’s effectiveness since its 2010 debut and has no plans to do so in the immediate future. However, there is anecdotal evidence that the guidelines help asset managers stand out, he said.

In addition, the audit watchdog also doesn’t yet know how it will evaluate the quality of the new outcome-focused reporting.

It could be a crucial shortfall if there isn’t a system to properly criticize businesses that fall short of the new guidelines, according to Fergus Moffatt, head of U.K. policy at ShareAction, a charity focused on responsible investing that consulted with the FRC on the update.

“The stewardship code is almost going to be used as a marketing ploy to say ‘Look how good we are,”’ Moffatt said. “There’s no incentive to do stewardship well if there’s no mechanism to be held to account.”

Christopher Woolard, who oversees strategy and competition at the FCA, said the rules should help funds maintain good stewardship practices, which will help their longer-term investments.

“We want to see those managing investments to take a close interest in how the businesses they invest in are operating, so they can hold them to account when things aren’t right,” he said in a statement.

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