Recent FCA Publications: FCA Continues to Focus on Investment Managers

Executive Summary

The UK’s Financial Conduct Authority (FCA) is continuing to emphasise its focus on investment management in a number of recent publications, including its Business Plan for 2018/2019, its policy statement on Asset Management Market Study remedies that sets out final rules (PS18/8) and a second consultation paper proposing additional remedies for this sector (CP18/9).  

The FCA Business Plan

The FCA published its “Business Plan 2018/19” on 9 April 2018 (the “Plan”)¹.

The Plan highlights issues that the FCA is prioritising for the next year, including cross-sector priorities, such as financial crime and data security, but also areas of key concern for the investment management sector. Notably, the Plan states unequivocally that the FCA is devoting substantial resources to the impact of Brexit on the UK’s financial services sector.

Business Plan: Sector-Specific Priorities Relevant to Investment Managers

Investment Management

• Key issues for the FCA in the sector include:
  • poor quality and value for money of products in the retail space
  • inadequate disclosure and lack of transparency
  • susceptibility to financial crime
  • cyber and technological resilience risks.
• The FCA plans to consult on a package of new rules and guidance in relation to liquidity management in open-ended funds.
• The Plan notes that the investment management sector has been an early adopter of a range of new and innovative technologies. This brings a risk of potential harm, service disruption and greater risk of exposure to cyber-crime. The FCA intends to engage with firms to ensure that they are allocating sufficient resources to address the issue.
• The European Commission has published a legislative proposal for a new prudential regime for investment firms authorised under MiFID II. The aim is to formulate more proportional rules for these firms. The FCA believes that these new and proposed measures will strengthen the governance of investment managers and will provide assistance to the Treasury during negotiations of the proposed text.
• The FCA is continuing to work with firms and European authorities in relation to the Packaged Retail and Insurance-based Investment Products Regulation, which has been in effect since January 2018. The FCA will contribute to the European Commission’s post implementation review of this regulation.
• The FCA will publish research looking at the rise of passive management in the UK and exploring its impact on aspects of financial market performance, such as corporate governance, market efficiency and financial stability.
• The FCA states that it is actively gathering intelligence on the impact of Brexit, the key changes for the sector arising from it and the approach that firms are taking to the issues they are encountering.

Wholesale Financial Markets

• The FCA is closely monitoring the ongoing impact of MiFID II on the sector and has noted the following:
  • MiFID II provides the FCA with better tools to deal with the potential harm that algorithmic high-frequency trading may cause the market by introducing new obligations and systems and controls for both traders and venues.
  • The FCA continues to be concerned about conflicts of interest and a lack of clarity provided by market participants. In light of the requirements regarding unbundling of research services and other rules introduced by MiFID II, the FCA will continue to focus on this area, monitoring compliance with the rules and assessing whether the rules are working as intended.
  • MiFID II introduces substantial changes to the wholesale market, and, as such, the FCA is monitoring the market for any unintended effects that MiFID II may have, particularly on market liquidity.
  • The FCA has also signalled that it plans to use the increased information that it will receive under MiFID II to monitor, detect and investigate potential abuse in the markets and enforce against unlawful behaviour.
• The FCA has recommended that firms actively plan for the possibility that LIBOR may not be produced past 2021 as the transition from this benchmark takes place. Firms should consider the impact that this would have on their documentation.
• The FCA proposes to publish final rules outlining its approach to industry codes of conduct this year.
• The FCA is concerned by the harm caused by a lack of transparency and accurate information during the IPO process, and a lack of understanding around the listing rules. There has been a notable increase in enforcement activity regarding conduct during the IPO process. With the FCA highlighting this as a continuing concern, such action is likely to continue.

Business Plan: Cross-Sector Priorities

Firms' Culture and Governance

• The FCA is finalising the rules for the extension of the Senior Managers and Certification Regime to all Financial Services and Markets Act firms and intends to publish new rules on this in summer 2018.
• The FCA plans to take a broad look at all firms’ remuneration arrangements in 2018/2019 to identify the potential or actual harm from the remuneration schemes of firms that are not subject to the Remuneration Codes.

Financial Crime and Anti-Money Laundering

• This issue remains a high priority for the FCA. Firms should be constantly assessing the effectiveness of their Financial Crime and Anti-Money Laundering processes.
• In March 2018, the FCA published proposed amendments to its regulatory guide on financial crime. The proposals included an additional chapter on insider trading and market manipulation and guidance on best practices.

Data Security, Resilience and Outsourcing

• Given the continuing risks of cyber-attacks, and as the sector becomes reliant on increasingly complex technology, the FCA is emphasising operational resilience as a priority for all market participants.
• Firms should also be mindful of the requirements of the General Data Protection Regulation (coming into force on 25 May 2018) regarding the use of third-party data processors and the security of data.

Asset Management Market Study – Publication of Policy Statement Setting Out Final Rules (PS18/8) and a Second Consultation on Further Remedies (CP18/9)

In April 2018, the FCA published a policy statement setting out final rules (PS18/8) (the “Final Rules”²) and a second consultation paper on further proposed remedies (CP18/9) (the “Consultation”³), intended to improve the value proposition offered by investment managers. The measures are designed to address the issues identified in the FCA’s Asset Management Market Study published in 2017.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA has said that these are “an important part of a package of measures that, combined, aim to achieve a fair, transparent, open and accountable market.”

The Final Rules will be phased in during the course of 2019, and the Consultation ends on 5 July 2018.

Why are these developments important to investment managers?

These measures reveal the way in which the FCA intends to drive competition and protect consumers in the sector. Although these measures are directed primarily at retail funds, they may inform the FCA’s approach to supervision of investment managers operating in the wholesale markets.

To whom do the Final Rules and the Consultation relate?

The Final Rules and the Consultation relate to UK investment managers and management companies (including the Undertakings for Collective Investment in Transferable Securities (UCITS) Management Companies) of authorised funds (AFM). The Final Rules and the Consultation’s proposed rules (in their current form) will not apply to non-UK UCITS management companies or to UK or non-UK alternative investment fund managers that manage or market unregulated funds in the UK.

U.S. and other non-EU investment managers are not affected by the proposed rule changes in the Final Rules and the Consultation.  

What are the Final Rules?

• Value for Money

AFMs are now required to make an annual assessment of value as part of their duty to act in the best interests of the investors in their funds.

• Independent Directors

AFMs are required to appoint a minimum of two independent directors to the board and ensure that independent directors comprise 25% of the total board membership. Such independent directors must not have any monetary link to the company.

• Moving Investors into Better Value Share Classes

Technical changes have been made to facilitate the movement of investors into cheaper share classes, with guidance recommending that AFMs make a simple one-off notification to investors.

• Returning Box Profits

Changes include a requirement on AFMs not to retain “risk-free” box profits and to allocate them in a way that is fair and in the interests of investors.

• New Senior Manager Prescribed Responsibility

A new specific Prescribed Responsibility will be introduced as part of the extension of the Senior Managers and Certification Regime, which will require a Senior Manager to take reasonable steps to ensure that the AFM complies with the obligation to carry out the assessment of value, the duty to recruit independent directors and the duty to act in the best interests of investors.

What are the proposed remedies published in the Consultation?

The Consultation’s proposed remedies are designed to address the FCA’s concerns that even actively engaged investors do not find it easy to choose which fund is right for them, and so the remedies are directed at funds providing better information about what they are offering.  

The Consultation includes proposals on:

• how fund objectives can be expressed more clearly and be more useful to investors
• making it clearer when funds are benchmark-constrained, or limited in how far their holdings can differ from the weightings of a benchmark index
• ensuring that, where a fund uses one or more benchmarks, this is disclosed consistently and explained to investors.

Contact Information

If you have any questions concerning this alert, please contact:

¹ https://www.fca.org.uk/publications/corporate-documents/our-business-plan-2018-19

² https://www.fca.org.uk/publications/policy-statements/ps18-8-implementing-asset-management-market-study-remedies

³ https://www.fca.org.uk/publications/consultation-papers/cp18-9-second-consultation-remedies-following-asset-management-market-study