The Financial Conduct Authority’s (FCA) Asset Management Conference, held in London on June 12, highlighted the continuing importance placed by regulators on conduct and culture. Another key theme was the risks posed to market efficiency by the rise of passive investment products, the growth of which has increased the importance of good standards of stewardship of investments by asset managers.
Andrew Bailey, Chief Executive of the FCA, expressed concern about the risk of misleading disclosure resulting from the Packaged Retail and Insurance-based Investment Products (PRIIPS) Key Information Document (“KID”). He warned that US managers may withdraw from the United Kingdom because of the regulation. Further work is needed to achieve the desired outcome for investors from the regulations.
Approach to supervision
The FCA will focus on the following three themes in the near-term:
- Asset managers need to act as good agents to investors.
- Asset managers need to act as good market participants.
- Asset managers need to act as good stewards of investments.
Asset Management Market Study (AMMS) Outcomes
The FCA defended its proposed governance reforms for authorized fund managers (AFMs) against the view that they were unfair to smaller firms and anti-competitive as a result. The FCA said they consulted the industry prior to the introduction of the rules and that a proforma audit-style report in relation to the public statement on the assessment of value by AFMs was unlikely to meet new compliance standards.
Asset Management and UK Withdrawal from the EU
The FCA highlighted the UK’s planned temporary permissions regime for MiFID firms passporting into the UK post-Brexit. The UK intends, as far as it has powers to do so, to guard against a cliff edge as at March 29, 2019 but they have no control over outgoing services from the UK into other EU Member States, which is for each Member State to decide. The FCA is working with other EU regulators to ensure supervisory co-operation agreements are in place in a timely manner to facilitate delegation arrangements post-Brexit. Significant, but proportionate, resources are being allocated by the FCA to Brexit issues, at around £30 million out of a total annual budget of over £500 million.
Conduct and Culture
The FCA re-emphasized the importance it places on senior management, clearly and unambiguously, establishing the correct culture from the top throughout organizations. This is a well-established theme from the FCA seeking to encourage a culture which promotes good behavior resulting in lower regulatory risk and a better chance that the FCA’s objectives will be met.
The FCA presented a new view on diversity. The FCA clearly encourages diversity, but the main message was that Firms should encourage views and take account of these from as ‘diverse’ a population in terms of age, background, experience and expertise and to positively encourage challenge. Only if this culture of challenge exists can the best outcomes be achieved for clients.
Asset Management Authorizations
The FCA raised awareness of its Asset Management Authorization Hub (“AMAH”), which is intended to streamline firms’ FCA authorization experience. Firms can register online for pre-authorization meetings with the FCA to explain their business plan, receive feedback from the FCA and be assigned a case officer. Firms can expect an accelerated path through authorization together with further support from the FCA post-authorization. The AMAH is intended for new managers with £10bn+ AuM, but the FCA confirmed they are prepared to be flexible. In our experience, the AMAH has shaved almost two months off the process.
Dealing Commissions and Research
Following MiFID II implementation, the FCA commented that they have seen an “overwhelming” number of firms paying for research out of P&L. They also felt the research market was still in the “price discovery” phase.
The FCA plans to begin a multi-firm (buy and sell-side) project to assess whether firms have aligned their operations and business activities with MiFID II requirements. They expect the review to last for six months and include a variety of sectors, asset classes and strategies, firms using both RPA’s and their own P&L and independent research providers (“IRP”s).
Specific focus areas for the FCA will include sell-side research pricing models, asset managers’ assessments of substantive research, the research budgeting process and RPA governance. They will also focus on the global dimension, where UK firms have delegated to third country entities and, how such firms ensure investor protection.
Market Abuse Systems and Controls
The FCA will survey firms to better understand their market abuse controls. They confirmed automation is not always necessary but, nevertheless, they expected firms to have implemented appropriate, proportionate and effective tailored risk-based systems suitable for their business models. The FCA helpfully expanded on their expectations in this area:
- Firms were reminded the Market Abuse Regulation covers more than equities;
- Attempted market abuse is also an offence;
- Focus on anomalous profits, losses and risks;
- They expect to see a healthy level of challenge within firms;
- Retention of records indicating how/why decisions were reached; and,
- Think of the spirit/objective of the legislation not only the letter of the legislation.
The FCA mentioned one specific enforcement case as an example of what not to do. To view, please click here.