UK: Tightening related party and board independence rules for closed-ended investment funds

Why should I read this?

On 26 June 2026, the FCA published consultation paper CP26/21 “Proposed changes to the UK Listing Rules for closed-ended investment funds”. The consultation proposes significant amendments to the UK Listing Rules (UKLRs) in Chapter 11 (closed-ended investment funds) and related provisions, aimed at strengthening protections for independent shareholders and tightening the governance framework for closed-ended investment funds (including investment trusts).

The proposals come against the backdrop of recent activist shareholder campaigns, notably Saba Capital Management’s campaign in 2024-2025 to requisition meetings and replace the boards of several UK investment trusts, which highlighted gaps in the existing regulatory framework. The FCA is seeking to address the risk that related parties (particularly investment managers and substantial shareholders) can leverage their positions to the detriment of independent shareholders.

What do I need to know about the proposed changes?

Background

Closed-ended investment funds (including investment trusts) are subject to Chapter 11 of the UKLRs, which imposes specific governance and related party transaction requirements tailored to the closed-ended fund structure. These include requirements around board independence from the investment manager and enhanced scrutiny of transactions between the fund and its related parties.

The FCA has identified concerns that the current rules do not go far enough to protect independent shareholders, particularly in situations in which:

• a substantial shareholder is also the investment manager (or is closely connected to the investment manager);

• a director has been proposed for appointment by a substantial shareholder, creating an ongoing association that the current “associate” definition does not adequately capture;

• a new investment manager is being appointed but, because it is not yet the incumbent, it falls outside the related party definitions; and

• the investment manager holds a significant voting stake that could be used to influence investment policy changes to its own advantage.

The FCA’s proposals

Board independence

The FCA proposes that the majority of the board of a closed-ended investment fund must be independent of the investment manager. The consultation explains what “independence” means in practice for these purposes, setting out the factors and connections that would compromise a director’s independence. This codifies and strengthens the existing expectation and is intended to ensure that the board is able to exercise independent judgment in the interests of all shareholders.

Related party transactions for substantial shareholders

The FCA proposes acknowledging the ongoing association between a director and a shareholder that proposed them for appointment, within the context of the related party and relevant related party transaction rules. This is most significant if the shareholder (or its associates) that proposed appointing the director is a substantial shareholder.

The FCA proposes amending the FCA Handbook Glossary definition of an “associate”, for its application in the UKLRs only, to include the association between a director and any substantial shareholder (or its associates) that proposed their appointment. The effect is that transactions involving such a director would be caught by the related party transaction regime.

Related party transactions for new investment managers

Currently, the definition of a related party covers the incumbent investment manager but does not extend to a proposed investment manager. This creates a situation in which, during the appointment of a new investment manager, the arrangement may fall out of scope of the relevant related party transaction rules designed to safeguard against an investment manager leveraging their position to secure fee structures that may not be fair and reasonable.

The FCA proposes amending the definition of a related party, and the definition of a relevant related party transaction, to specifically include a “proposed investment manager” (defined as a person who would become the investment manager under a transaction or arrangement the closed-ended investment fund is proposing to enter into). The intention is for the relevant related party transaction rules to apply when a closed-ended investment fund enters into an agreement to appoint a new investment manager, regardless of whether the proposed investment manager is otherwise a related party.

Investment policy changes if the investment manager is a substantial shareholder

If a substantial shareholder is also the investment manager of a closed-ended investment fund, the risk (or perception) of influence over the board could be increased. The investment manager would also have a significant vote on any proposed material change to the investment policy and could potentially influence or support a change not supported by the majority of other shareholders.

The FCA wishes to explore this area further, given the risk and perception of a conflict of interest.

Independent shareholder votes

The FCA proposes that a substantial shareholder who is also the investment manager of a closed-ended investment fund, and any of its associates, be excluded from voting on a material change to an investment policy. The FCA has included alternative options to address its concerns, indicating that it recognises this element is controversial and is open to different approaches.

This proposal, together with the proposal in relation to investment policy changes if the investment manager is a substantial shareholder, represent the most significant tightening of the current regime and is expected to attract considerable feedback during the consultation period.

Associates definition for related party transactions

The FCA proposes to clarify that the reference to “associates” of a related party (see UKLR 8.1.11R(4)) is also intended to apply to the extension of the related party definition under UKLR 11.5.3R for closed-ended investment funds. UKLR 11.5.3R states that for a closed-ended investment fund a related party includes any investment manager and any member of the investment manager’s group. The FCA proposes to clarify that an associate of an investment manager, or any member of the investment manager’s group, is also a related party.

Transitional arrangements

If rules come into force there will be a short period (approximately four weeks) after the FCA publishes the policy statement and final rules taking effect. Firms should be prepared to comply relatively quickly once the final rules are published.

Summary of key proposals

Element	Proposal	Effect
Board independence	Majority of the board must be independent from the investment manager	Codifies and strengthens existing expectations; sets out factors compromising independence
Definition of “associates” – directors proposed by substantial shareholders	Amend “associate” definition (UKLRs only) to capture directors proposed by substantial shareholders	Transactions involving such directors caught by the related party regime
Fee negotiations with proposed investment managers	Extend “related party” and “relevant related party transaction” definitions to include proposed investment managers	Fee negotiations for new manager appointments subject to related party oversight
Changes to investment policies	Explore conflicts if the investment manager is also a substantial shareholder and has a significant vote on policy changes	Intended to protect independent shareholders from policy changes driven by conflicted parties
Independent shareholder votes	Exclude investment manager (if substantial shareholder) and associates from voting on material investment policy changes; alternative options also proposed	Significant restriction on voting rights of conflicted substantial shareholders; most controversial element
Definition of “associates” – related parties	Clarify that “associates” of a related party under UKLR 8.1.11R(4) applies to the extended definition in UKLR 11.5.3R	Associates of investment managers and their group members brought within definition of related parties
Transitional arrangements	Rules to come into force approximately four weeks after the policy statement	Four week transition period

 What should I do?

Boards, investment managers, substantial shareholders and advisers to closed-ended investment funds should consider taking the following steps:

• Review CP26/21

Assess how the proposals affect your fund’s governance arrangements, board composition, and the scope of transactions that would be caught by the expanded related party regime.

• Assess board independence

Review the composition of your board against the proposed independence criteria. Identify any directors whose independence from the investment manager may be compromised under the new rules and consider succession planning.

• Map your related party relationships

Consider whether any current or proposed relationships (including with substantial shareholders who have proposed directors, or with prospective new investment managers) would be caught by the expanded definitions.

• Review investment management agreements

If you are a substantial shareholder who is also the investment manager, assess the impact of the proposed voting restrictions on your ability to influence investment policy changes.

• Consider the independent shareholder vote proposals

If you are a substantial shareholder/investment manager, model the impact of being excluded from votes on material investment policy changes. Consider the alternative options presented by the FCA and whether to advocate for a particular approach.

• Engage with the consultation

Contribute to the consultation responses, whether by submitting your own response or through trades bodies. The proposals on substantial shareholder voting are the most controversial and the FCA is open to alternative approaches - this is an opportunity to shape the final rules.

• Plan for a short transition period

The FCA proposes only approximately four weeks between publication of the policy statement and the rules coming into force. Early preparation will be essential.

Our view

CP26/21 represents a meaningful tightening of the governance and related party framework for closed-ended investment funds. Many of the proposals, particularly the clarifications around board independence, are logical refinements that address genuine gaps in the existing rules.

The proposal to exclude substantial shareholders who are also investment managers from voting on material investment policy changes is a significant intervention. While the FCA’s concerns about conflicts of interest are understandable, there are genuine questions about proportionality, the risk of disenfranchising legitimate shareholders, and whether the alternative options presented by the FCA would better achieve the policy objectives without overreaching.

Next steps

The consultation closes on 14 August 2026. The FCA will consider all feedback before publishing a policy statement with final rules.

How Eversheds Sutherland can help

Eversheds Sutherland is a leading legal adviser to the investment funds sector, including to boards, managers, sponsors and substantial shareholders of UK-listed closed-ended investment funds. Our team has significant experience advising on the UK Listing Rules as they apply to closed-ended investment funds.

Our team can assist with:

• assessing the impact of CP26/21 on your fund and board structures;

• reviewing board composition and independence against the proposed criteria;

• advising on related party transaction processes and the expanded associate definition;

• advising substantial shareholders and investment managers on voting rights, conflicts and the proposed restrictions;

• preparing your consultation response;

• planning for the transition period once final rules are published; and

• ongoing compliance with the UKLRs for closed-ended investment funds.