UK: Q3 2013 Investment Management Regulatory Update

Last Updated: 29 October 2013
Article by Deloitte Financial Services Group

Most Read Contributor in UK, August 2017


Welcome to the eighth edition of our Investment Management Regulatory Update which summarises the key regulatory developments affecting the UK investment management sector.

In this edition we cover key international, European and UK developments including:

  • FCA speeches
  • AIFMD update
  • Capital Requirements Directive update
  • RDR update
  • Shadow Banking
  • Q3 2013 FCA enforcement summary


Over the last quarter, key individuals from the Financial Conduct Authority ("FCA") have made a number of speeches on the FCA's approach to achieving its statutory objectives.

Christopher Woolard – Competition and Conduct Regulation in Financial Services

On 9 September, Christopher Woolard, the FCA's Director of Policy, Risk and Research, gave a speech at the Regulatory Policy Institute's Annual Competition and Regulation Conference. Mr. Woolard's speech highlighted some of the fundamental competition issues faced by the financial services industry and focussed on the steps that the FCA are taking to address them:

  • A lack of engagement with consumers, by the industry as a whole, is preventing firms with a focus on customer service and quality products from winning market share from less engaged incumbents.
  • Informational asymmetries between firms and consumers are preventing clients from making informed decisions about the products they choose. This lack of information is preventing consumers from identifying poor products and therefore reducing the level of product switching.

Mr. Woolard believes that competition should be about more than choosing between a range of suppliers who all seemingly offer the same badly behaving products. Switching between products must be as simple as possible and exit penalties should be justifiable.

The FCA is adopting the following methods to drive forward its competition objective:

  • Looking internally to streamline the authorisation process and reviewing the Handbook to assess whether existing rules and processes may inadvertently prohibit competition.
  • Launching in-depth market studies to investigate competition aspects of specific markets such as general insurance add-ons, cash savings and SME banking. At the end of a study, the FCA plans to either use its powers to make any changes it deems necessary or refer the issue to the Competition and Markets Authority ("CMA").
  • The FCA will also focus on wholesale markets, including the asset management sector, and in Spring 2014 will be conducting a wholesale strategic review to assess where competition issues may lie.

In conclusion, Mr. Woolard summarised that the FCA will seek to improve customer outcomes by incentivising firms to direct their energies into competing in the interests of consumers through fundamentally changing the nature of the markets it regulates.

Clive Adamson speech – The FCA's Approach to Supervising Wealth Management and Private Banking Firms

On 2 July, Clive Adamson, FCA Director of Supervision, speaking at the APCIMS Compliance Conference in London gave a speech stating that the FCA is putting into place a new supervision model that focuses on ensuring firms put the interests of the customer and market integrity at the heart of how they run their business. This will be done by a continuation of individual firm risk assessments, dealing with events that may crystallise as detriment and more thematic reviews. There will be the following differences from the previous approach:

  • Firm risk assessments will be focused more on looking at the business models of firms, strategies, culture and front-line processes rather than on the traditional approach of focusing on controls.
  • It is a shift from looking at how a firm controls itself to how it runs itself.
  • Additional resource will be devoted to into thematic reviews. The FCA believes that this is the most effective way of delivering its conduct priorities and the FCA will be more transparent about the aims of its thematic reviews before work commences.
  • The FCA internal structure will change in order to align with this new approach. The FCA has put in place sector-focused departments that are more clearly aligned with the whole industry.
  • There will be a shift from a primarily reactive mindset to one that is more pre-emptive when the FCA identifies issues. The regulator's work will be less tick-box and use more judgement; it will focus more on the big issues affecting firms and sectors; and be more orientated towards firms doing the right thing instead of simply monitoring compliance with rules.

Mr Adamson also described the two pieces of thematic work which the regulator has also conducted in the Wealth Management sector. The first, in Autumn 2010, involved reviewing a number of retail client investment portfolios in 16 wealth management firms. The regulator discovered a number of issues. Most firms in its sample were unable to demonstrate the suitability of their customers' investment portfolios, either because of the lack of client information on file, or because the portfolios did not appear to match customers' investment objectives or appetite for risk. However, the regulator noted that there was relatively little actual detriment at that point.

The regulator then conducted a second phase of review last year, focusing on six UK retail banks which have or were planning to have substantial Wealth Management offerings. The regulator found that firms had made improvements, including in how new clients were taken on. However, it was highlighted that firms need to continue raising their standards to be able to demonstrate that they are providing their customers with managed investment portfolios that are right for their needs and circumstances. The regulator also found a number of cases where suitability could not be determined or there was a high risk of unsuitability, and some firms' descriptions of their Wealth Management offerings may have led customers to misunderstand the service they were receiving. None of these findings mean that consumers have been subject to widespread detriment, however the need for firms to stay focussed on delivering the right outcomes for their consumers was emphasised alongside treating them fairly and creating a culture that delivers these things.

The FCA is currently in the final stages of setting up a Wealth Management and Private Banking Department in order to provide focus for its expertise in this sector. Clive Adamson has also spoken about further thematic work in this space.


The Alternative Investment Fund Managers Directive ("AIFMD") came into force on 22 July 2013 and there have been a number of developments this quarter to ensure firms understand and are applying the rules correctly.

ESMA publishes guidelines on sound remuneration policies under AIFMD

On 3 July, the European Securities and Markets Authority ("ESMA") published its guidelines on sound remuneration policies under the AIFMD. The guidelines relate to remuneration policies and practices for Alternative Investment Fund Managers ("AIFMs") and their identified staff. Their guidelines seek to ensure the uniform and consistent application of the provisions on remuneration in articles 13 and 22(2)(e) and (f) of, and Annex II to the AIFMD. The guidelines apply from 22 July 2013, subject to the transitional provisions of the AIFMD.

The FCA has since stated that it has written to ESMA to confirm that it will comply with the guidelines on remuneration policies under the AIFMD. The FCA also confirmed that a firm that holds the permission of 'managing an Alternative Investment Fund ("AIF") and is a full-scope UK AIFM must make every effort to comply with the guidelines. Firms taking advantage of the transitional provisions in the UK's AIFMD implementation do not need to comply with the guidelines until they are authorised as full-scope UK AIFMs. However, the FCA recommends that these firms start their preparations for implementing the guidelines as soon as possible.

The Alternative Investment Fund Managers Regulations 2013

On 17 July, the Alternative Investment Fund Managers Regulations 2013 ("AIFMR") were published together with an explanatory memorandum. The AIFMR came into force on 22 July 2013 and implemented the majority of the provisions contained in the AIFMD.

On the same day, HM Treasury published a transposition table which shows which provisions of the AIFMD are being transposed into the FCA Handbook and/or through secondary legislation and which provisions require no transposition.

FCA updates information on AIFMD application deadlines

On 2 August, the FCA confirmed the following key deadlines for applying for authorisation that are relevant to firms already managing AIFs before 22 July 2013:

  • no later than 22 January 2014: this is the suggested application deadline for firms seeking an authorisation or a Variation of Permission under AIFMD (including small authorised UK AIFMs and depositaries) to allow the FCA up to six months to determine the application;
  • 22 April 2014: firms that need to be authorised as full-scope UK AIFMs or need to be registered, should submit a complete application no later than this date;
  • until 21 July 2014: firms already managing AIFs may continue to manage an AIF without being either authorised with the permission of managing an AIF, or registered as a small registered UK AIFM; and
  • 22 July 2014: this is the deadline by which firms intending to continue the above activities after that date must apply to be authorised or registered (similar provisions apply to firms requiring authorisation to act as trustee or depositary of an AIF).

The FCA is not obliged to determine before 22 July 2014 any application received after 22 April 2014. Any firm that believes it will not be able to meet the deadlines should contact the FCA as soon as possible.

FCA publishes UK passporting arrangements FAQs

On 27 August, the FCA published a set of FAQs on passporting arrangements under the AIFMD. The FAQs are designed to help firms and their advisers with the passporting process. The FAQs are not a substitute for considering the relevant parts of Treasury legislation, EU legislation and the FCA Handbook, or seeking professional advice as appropriate.

FCA consultation on the AIFMD remuneration code

On 6 September, the FCA released their quarterly consultation paper ("FCA CP") which proposes draft guidance on:

  • the FCA's "AIFM Remuneration Code"; and
  • ESMA's "Guidelines on sound remuneration policies under the AIFMD".

The AIFM Remuneration Code and ESMA's Guidelines apply to UK-based managers of hedge funds, private equity funds and real estate funds, as well as managers of other non-UCITS-regulated funds.

Deloitte has published an alert summarising the key points of the FCA CP for these firms which offers them further clarity in a number of areas including timing, proportionality and payment in instruments (including carry). The paper also sets out a number of non-exhaustive examples working through the FCA's suggested approach to proportionality.


PRA consults on proposed changes to PRA Handbook to implement CRD IV

On 2 August, the Prudential Regulation Authority ("PRA") published a consultation paper "Strengthening Capital Standards: Implementing CRD IV - CP 5/13" setting out the proposed changes to the PRA Handbook to implement CRD IV. In addition to Banks and Building Societies, these changes will apply to all other PRA designated investment firms.

The key areas covered in the consultation paper are as follows:

  • how the PRA is planning to operate discretions and derogations provided under the Capital Requirements Regulation ("CRR");
  • how the PRA is planning to operate the transitional provisions provided under CRD and CRR;
  • how the PRA is intending to transpose the obligations in CRD into rules;
  • the content of the draft Supervisory Statements;
  • the deletion or disapplication of existing PRA rules as part of CRD IV implementation; and
  • specific questions set out in individual chapters of the CP regarding proposals on pillar 2, credit risk, market risk and Large Exposures.

The consultation closed on 2 October 2013. The PRA will publish a Policy Statement with feedback, finalised rules and final supervisory statements in December 2013.

FCA consults on proposed changes to FCA Handbook to implement CRD IV

On 31 July, the FCA published a consultation paper "CP13/6 - CRD IV for Investment Firms" setting out the proposed changes to the FCA Handbook to implement CRD IV for Investment Firms. The proposals in the consultation paper will apply to the following:

  • investment firms that are currently subject to the CRD;
  • firms that are currently exempt from capital requirements and large exposures for specialist commodities derivatives firms;
  • firms that only execute orders and/or manage portfolios, without holding client money or assets; and
  • other firms in the investment sector (exempt-CAD firms, management companies – as defined under the UCITS Directive, AIFM – as defined under the AIFMD, subject to certain CRD IV provisions (e.g. on 'initial capital' in the Directive)).

Key changes proposed include:

  • the introduction of a new 'Prudential Sourcebook for Investment Firms' (IFPRU);
  • a new prudential category called 'BIPRU firms' for certain firms that only execute orders and/or manage portfolios, without holding client money or assets;
  • changes to the definition of own funds requirements; and
  • additional reporting obligations.

The consultation period ended in September 2013 and the FCA will publish a Policy Statement and final rules later in 2013.

EBA consults on draft regulatory technical standards on own funds requirements for investment firms

On 17 July, the European Banking Authority ("EBA") published a consultation paper Draft Regulatory Technical Standards on own funds requirements for investment firms as mandated under the CRR. The proposed changes are aimed at investment firms with limited authorisation to provide investment services. It also applies to management companies, as defined under the UCITS Directive, and AIFM

The consultation paper covers in detail the calculation of the requirement to hold eligible capital of at least one-quarter of the fixed overheads of the previous year and aims to:

  • provide a clear definition of fixed overheads;
  • harmonise and specify in more detail conditions under which competent authorities can make adjustments to the capital requirement in a case where there has been a material change in the business activities of an investment firm. The proposal is to consider a change in business activities as material if the fixed overheads change by at least 20% or there is an absolute change of €2 million in the capital requirement;
  • introduce a 'subtractive' approach to the calculation of fixed overheads, where all variable costs are deducted from total expenses; and
  • propose the inclusion of tied agents in the calculation of fixed overhead costs, as business carried out through a tied agent exposes an investment firm to risk in the same manner as business carried out by the investment firm itself.

The consultation period ended in September 2013.


As the FCA communicated in the run up to Retail Distribution Review ("RDR"), it is conducting post implementation reviews on key components of the RDR to ensure that firms have implemented it in line with the FCA's expectations. The following two papers are as a result of this approach; and further reviews on RDR topics are anticipated.

TR13/5 - Supervising retail investment advice: how firms are implementing the RDR

The FCA has published the outcome of a thematic review into how firms have implemented RDR rules relating to the new adviser charging requirements. The FCA conducted a review of over 50 firms from across the industry of how they devise, disclose and deliver their services and charges. The key findings were that:

  • some firms were not providing clients with some or all charges in cash terms;
  • some firms fell down by not being clear what ongoing services they would provide;
  • the FCA had concerns that some firms, while describing themselves as independent, were not offering a truly independent service ;and
  • some firms providing restricted advice were not adequately describing the nature of the firm's restriction.

The FCA is expecting firms to have benchmarked their approach and make any required changes. The FCA has already commenced a re-review of this topic. At the start of October 2013, the FCA contacted 120 firms in a wider, 'more statistically valid' review.

FCA GC13/5 - Supervising retail investment advice: inducements and conflicts of interest

The FCA has also published a guidance consultation which detailed the outcome of the FCA thematic review into payments between providers and advisory firms. This thematic review was as a result of a Dear CEO letter the FCA issued to 26 life insurers and advisory firms seeking information about the service or distribution agreements they operated. Within the resulting paper, the FCA:

  • explains why it thinks certain payments between providers and advisory firm may cause conflicts of interest and also gives some examples of good and bad practice; and
  • proposes guidance on how advisory firms might want to deal with conflicts caused by providers paying for IT development and maintenance, staff training, conferences and seminars, hospitality, research and promotional activities.

Comments were required back to the FCA by 18 October 2013.

For further information, visit


Financial Stability Board publishes three papers on shadow banking

On 29 August, ahead of the September G20 meeting in St Petersburg, the Financial Stability Board ("FSB") published a series of papers on shadow banking, including:

A report entitled An Overview of Policy Recommendations which sets out the FSB's overall approach to addressing financial stability concerns associated with shadow banking, actions taken to date, and next steps.

A report entitled Policy Framework for Strengthening Oversight and Regulation of Shadow Banking Entities that sets out the high-level policy framework to assess and address risks posed by shadow banking entities other than MMFs. This set out five economic functions by which to identify shadow banking, as well as a menu of policy tools that authorities could draw on as part of the oversight and regulation of each function.

A report entitled Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos which sets out recommendations for addressing financial stability risks in this area, including enhanced transparency, regulation of securities financing, and improvements to market structure. Noting "significant data gaps", the recommendations focused on increasing transparency. It also includes consultative proposals on minimum standards for methodologies to calculate haircuts on non-centrally cleared securities financing transactions and a framework of numerical haircut floors which would only apply to a limited pool of SFTs.

EU Commission proposes new rules for Money Market Funds

On 4 September, the EU Commission published a proposal on a Regulation for Money Market Funds ("MMF") and a communication outlining its wider shadow banking work.

The MMF Regulation is intended to address the risk that investor "runs" could affect the stability of the sponsor, the wider financial sector and ultimately the real economy. It is also intended to protect investors by reducing the potential disadvantages for late redeemers, particularly in stressed market conditions. The proposal will have a significant impact on MMFs, as well as their investors and those who use MMFs for funding purposes. A key proposal is the introduction of a 3% cash buffer for Constant Net Asset Value (CNAV) MMFs. This will reduce the profitability of these types of funds and push up fees for investors, with the Commission putting the increase in management fees at between 9 and 30 basis points annually. The Regulation also proposes rules on what MMFs can invest in and what activities they can perform, restricting the type of collateral that can be used in reverse repurchase (repo) agreements and prohibiting MMFs from engaging in certain types of SFTs.

It also proposed rules related to scope, risk management, valuation, transparency and external support. The proposals on risk management are aimed at ensuring adequate MMF liquidity, including thorough "know your customer" and stress testing requirements, as well as a restriction on MMFs soliciting or financing external credit ratings.


There were 42 final notices published in the quarter ending 30 September 2013, with failure to satisfy the Threshold Conditions being a prominent theme once again.

In relation to action against firms, systems and controls failings (breach of Principle 3) were again present, alongside further failures by firms to treat customers fairly, in particular in relation to mortgage repayments, where one organisation was fined £8,904,000.

In addition, in September the FCA imposed fines on two wealth managers. The first was to Aberdeen Asset Managers Ltd and Aberdeen Fund Management Ltd which were fined £7,192,500 for failing to identify and therefore properly protect client money placed in Money Market Deposits with third party banks. The FCA stated that Aberdeen had determined that the money was not subject to its rules, incorrectly, which meant it did not obtain the correct documentation from third party banks when it set up the accounts. The second was AXA Wealth Services Ltd which were fined £1,802,200 for failing to ensure the investment advice given to their customers was suitable, and putting customers at risk of buying unsuitable products.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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