Compliance Code Cracker: Corporate Directors

In the United States the term "corporate director" is synonymous with the UK term "company director." In the UK, while it may be used in this way, it is also used differently in the contexts of asset management and company law.

In the context of asset management, the Financial Conduct Authority (FCA) has recently begun a multifirm review of the effectiveness of fund governance standards at firms that act as "so-called host authorised corporate directors" (ACDs) for asset managers.

An ACD is a sub-category of the main category ─ authorised fund manager (AFM). The FCA characterises a "host ACD" as a firm that holds itself out to act as an ACD for asset managers, but which is not an affiliate firm of the asset management group. It is clear, therefore, that in this context, the regulator is focusing not on all categories of AFM — which include ACDs, authorised contractual scheme managers and authorised unit trust managers — but only on "host" ACDs which are AFMs of open-ended investment companies (OEICs) and which are not within the group structure of the delegate investment manager.


An ACD is the AFM of an open-ended investment company (OEIC). OEICs featured in section 75(8) of the Financial Services Act 1986 which pre-dated the first Directive on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) in 1985.

The first OEIC in the UK was not, however established until 1997 after the coming into force of the Open-Ended Investment Companies (Investment Companies with Variable Capital) Regulations 1996 in January 1997 and the Open-ended Investment Companies (Tax) Regulations 1997.


Regulation 2(2) of the OEIC regulations provided that an authorised OEIC should be known as an "investment company with variable capital (ICVC). "The explanatory note applicable to the regulations stated that they made provision for "the formation in Great Britain of a class of body corporate referred to in the Regulations as an investment company with variable capital. "

This rather odd reluctance to call these investment vehicles "OEICS" may have stemmed from the fact that, in the 1980s, the derogatory public schoolboy term for a lower-class person, "OIK", was adapted as "yuppie" slang for a lower status male with one income and kids.

This may not have been seen as appropriate image for a new investment vehicle ─ aimed at aspirational retail investors ─ to conjure up.

Such reluctance was clearly displayed in the remarks of The Minister of State, Department of Social Security, Lord Mackay of Ardbrecknish when introducing the regulations in the House of Lords thus: "I hope that your Lordships will forgive me if I refer to them from now on by the rather inelegant title of OEICs—not in the usual meaning of "oiks" but with a different meaning."

The economic impetus behind the OEIC regulations

OEICs were developed to capitalise on the perceived opportunities following the first UCITS directive in opening up the continental European retail funds marketplace to firms in the UK.

There was a perception that European investors were unfamiliar with the concept of trusts ─ and, therefore, unit trusts ─ whereas OEICs would be similar in design and structure to European funds, such as Luxembourg SICAVs.

Another issue of significance to the industry as that time was ─ as noted in the House of Lords by Lord Eatwell ─ that they were all acutely aware of the problems that had been encountered in the unit trust business of Morgan Grenfell ─ problems that had tarnished the reputation of that particular form of investment product.

The roles of ACD and investment manager in the case of OEICS/ICVCs and the relationship between them have been under scrutiny, particularly regarding suspensions, such as that of the Woodford Equity Income Fund WEIF) by ACD Link Asset Services (Link).

The ACD is accountable to the regulator

The regulatory regime applicable to the ACD role as it ostensibly operates can be viewed as being somewhat at odds, however, with the reality of how the role can operate in practice and how, as a result, conflicts of interest may arise which can be detrimental to the interests of investors.

The FCA noted further that in such cases, a conflict of interest might arise if the "host" ACD could not oversee the fund properly because, for example, it was concerned to avoid a loss of revenue from the investment manager if it were to offer more assertive challenge.

The FCA said it was concerned "host" ACDs might not be undertaking their responsibilities effectively in some cases, leading to poor-value products and failure to manage risks properly.

In his evidence to the Treasury Select Committee on June 25 2019, FCA CEO, Andrew Bailey, said FCA rules permitted ACDs to delegate functions, such as investment management, to appropriate third parties.

ACD Link had appointed Woodford Investment Management (WIM) to manage the assets within the fund in line with the investment mandate it had given to WIM. Bailey also emphasised that the FCA had not approved WIM's appointment by Link.

Bailey said that, while the FCA had authorised the investment manager, WIM, and it could, therefore, undertake the regulated activity of "managing investments" under article 37 of the Regulated Activities Order, it was not the AFM of the fund.

He said it was the AFM that had the regulatory responsibilities in relation to the fund, which meant that meant Link was accountable to the FCA. He also said that in terms of the senior managers regime, the primary point of responsibility would be Link.

Corporate directors and company law

The term “corporate director” has a different technical meaning in the context of financial crime and company law. In FATF's review on anti-money laundering in the UK it specifically referenced the fact that the UK National Strategic Assessment on Serious and Organised Crime had identified a high risk of criminals abusing companies for money laundering purposes, often with the aid of professional facilitators including those providing trust and company services.

FATF also indicated that larger trust or company services provider firms were more at risk of dealing with politically exposed persons (PEPS). The role of Companies House has also been the subject of significant attention in this context.
One particular aspect of the trust or company services provider sector was referenced in the government response to the discussion paper on transparency and ownership of UK companies. The government noted that there was potential for a lack of transparency and accountability of directors which could occur through the use of corporate directors, where a company director was not a natural person (an individual) but a legal person (another company).

In this context the word "corporate" refers to the status of the entity serving as a company director, rather than to the company on which such a corporate director is a board member.
The use of such entities in such a capacity was characterised as potentially problematic because:

  • The use of corporate directors could bring about a lack of transparency and accountability with respect to the individuals influencing the company;
  • Their details and relationship to the company could be challenging to identify, which, among other consequences, could hinder law enforcement investigations;
  • Even when they were identifiable, there might be no legal route to holding them individuals to account;
  • A company acting as a director, instead of an accountable individual, could suggest the potential for a deficit in corporate governance and oversight.

The corporate director prohibition

Section 87 of the Small Business, Enterprise and Employment Act 2015 has now outlawed the use of corporate directorships, while setting out powers for the government to make regulations providing for certain limited exceptions. The prohibition is not yet in force, however, and the regulations have not yet been published.

In a related consultation on exceptions to the new ban, the sponsoring Department for Business, Innovation and Skills (BEIS) said some companies lacked transparency because their directors were other companies and it was been soliciting views on circumstances where the use of corporate directors of UK companies should be allowed.

Examples cited included situations where the use of corporate directors was of high value to the company and represented a low risk to corporate transparency.

A spokesman from BEIS told Thomson Reuters Regulatory Intelligence that, although no timetable for bringing the prohibition into force had been published, they did plan to proceed with this measure in the near future.

Corporate directorships in the courts

In one case relating to the disqualification of an individual, John Andrew Henry Nuttall, as a company director the High Court had considered his position as corporate director of another company.

The court held that this did not automatically make him de facto director of the other company. They found, however, that if he had caused the company of which he was a director to act in a way that, had it not been a de jure director of the other company, would have made it a de facto director of the other company, then he would also be deemed to be a de facto director of the other company.

The court found, however, that this was not the case on the facts. He had not, either individually or through his control of the corporate director, taken any step which indicated that either he or his company had assumed the status and functions of a director of that company.

However, subsequently, the Supreme Court decided that imposing fiduciary duties on directors of corporate directors to companies was a dramatic extension of the law, and that the legislature should amend the law if that was what it intended. That approach has been adopted by the new prohibition.

In the Nuttall judgment Nuttall had described his company, Legal Directors Ltd (LDL), as being a director of numerous different companies. He stated that:

  • In each case it had played no active role in the management of the company of which it was a director but instead acted as a nominee;
  • This service had been provided through Anglo-Legal Ltd (Anglo-Legal) and its associated companies, who provided company start-up, accountancy, tax planning and other corporate services from offices in London and Liverpool;
  • In return for LDL acting as a nominee corporate director of a given company, the beneficial owners of that company had paid an annual fee to Anglo-Legal Ltd and/or its associated companies;

Written by:

Thomson Reuters Regulatory Intelligence and Compliance Learning

Thomson Reuters Regulatory Intelligence and Compliance Learning on:

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