Welcome to the September edition of our monthly newsletter.
In the UK, regulatory initiatives continue at a slow pace, at least from the perspective of a regulated investment firm or fund manager. Whilst the FCA's priorities remain consistent, various initiatives previously communicated by the FCA are on a slower track or – in some cases – there has been radio silence. For example, 12 months ago, the FCA proposed revising the role of non-financial misconduct within the senior managers and certification regime ("SMCR"). However, unexpectedly, the proposals have not yet been implemented.
Another initiative to look out for is tackling the "alphabet soup" (as described by the FCA) of UCITS, AIFMD and MiFID, including a review of AIFMD, which took effect in the UK in 2013 and has remained largely unchanged since. There might be some movement on this before the festive season, but this cannot be guaranteed.
In the US, the end of summer was punctuated by the SEC's Division of Enforcement, which levied a series of fines against a litany of firms, seemingly across all areas of the Advisers Act. This period also witnessed a slowdown in proposals and adoptions of new rules, notwithstanding the CFTC's amendments to Regulation 4.7. Expect that to change soon.
In the near future, we anticipate the finalization of several key rules that have been in the pipeline. The SEC is expected to finalize its previously proposed rules relating to ESG disclosures, cybersecurity, and outsourcing and delegation.
There is also expectation for the SEC to re-propose its amendments to the Custody Rule (originally proposed in March 2023) along with its new rule related to the use of AI and predictive data analytics (originally proposed in July 2023). Additionally, the likely publication of its annual report on enforcement results along with updated examination priorities could make the fourth quarter quite newsworthy.
UK / Consumer Duty
Price and value outcome: Good and poor practice update
The FCA has published an update on how firms across the financial services sector have assessed their products and services against the price and value outcome of the Consumer Duty.
The price and value outcome is one of four Consumer Duty outcomes, alongside products and services, consumer support, and consumer understanding.
The FCA sets out some key messages to firms:
- Outcomes of the Consumer Duty should be considered holistically; the price and value outcome should be considered alongside the other outcomes and crosscutting obligations
- Effectively identifying target markets helps in assessing impacts on different customers;
- Where relevant, an analysis of cross-subsidies can be helpful in identifying where different consumer groups may be at risk of not receiving fair value;
- Evidence is vital in fair value assessments, but firms should be proportionate in their approach; and
- Prompt action should be identified and taken if fair value assessments show consumers are at risk of not receiving fair value.
The FCA's review focussed on specific sectors: cash savings; guaranteed asset protection insurance; and platform cash. However, the findings are also relevant to other sectors.
The FCA reminds firms that it does not expect small firms to embed the Consumer Duty in the same way as larger firms. Firms should take a reasonable and proportionate approach in the light of their resources, size of client base, and the complexity of the factors being considered in the fair value assessment.
Although not explicitly stated by the FCA, the profile of the client or investor base might also be a key consideration when considering proportionality. For example, an asset manager that manufactures an alternative investment fund that is mainly for professional investors but has a small number of retail investors, such as high net worth individuals, is likely to adopt a different approach to an asset manager that manufactures a UCITS fund.
Meanwhile, a vast majority (92%) of advisers attending FT Adviser's recent Financial Advice Forum believe that the Consumer Duty has been positive, albeit another survey found just 22% of consumers said they had already noticed improvements on how they were being treated.
UK / Regulatory Update
Oversight of Appointed Representatives improving but more to do, says the FCA
The FCA has for some time had principal firms and their appointed representatives ("ARs") on its radar. "Improving oversight of ARs" featured prominently in the FCA's 2022- 2025 Strategy under Focus 1: Reducing and preventing serious harm. In a nutshell: "The potential for consumer harm from ARs is too high. Consumers are at risk of being misled, mis-sold and under-protected when things go wrong".
A Policy statement (PS22/11) on improvements to the ARs regime duly appeared in Autumn 2022 and since then, a steady stream of enforcements, supervisory interventions and other communications have emerged to keep these firms on their toes. Most recently, these have included one case that went as far as the Court of Appeal: KVB Consultants Limited v Jacob Hopkins McKenzie Limited and others. ARs and introducer ARs undertaking credit broking were honoured with their very own webpage in April 2024 and in June 2024, the FCA set out its expectations specifically for principal firms with overseas ARs. ARs even merited a mention in the FCA's letter on Non-financial misconduct, addressed in February 2024 to the insurance industry – one sector firmly on the "naughty step".
Then on 6 September 2024, the FCA published its Good practice and areas for improvement to assist principal firms in their oversight and monitoring of ARs. It reviews how principals are meeting the December 2022 enhanced rules, which require principals to conduct annual reviews of each AR they appoint, and annual self-assessments of their ability to oversee their ARs.
The FCA based its analysis on a telephone survey with 251 principals and detailed assessments of documentation from 23 firms – thus engaging with a total 274 principals, approximately 10% of the overall constituency.
Some examples of good practice:
- Clear documentation showing compliance with enhanced rules
- Broad range of checks and information to oversee and monitor ARs' activities
- Clear written records of reviews and self-assessments, signed off by the principal's governing body
- Using a range of management information to assess the risk of
harm to consumers or markets: such as
- Quality assurance checks on client files;
- Customer satisfaction surveys;
- In-person visits to ARs; and
- Mystery shopping exercises
- Having regard to Consumer Duty when making annual reviews, such
as
- Fair value assessments; and
- Staff training.
and of poor practice:
- Tick-box approach to complying with the rules
- Reliance on basic information, like website checks, or ARs' self-declarations, to demonstrate oversight
- Failure to undertake required self-assessment or annual review of ARs (about 1 in 5 principals)
- Omitting to use data or management information to check ARs were acting within scope of their AR agreements (about 1 in 3 principals)
- Not regularly reviewing AR agreements (half of principals)
- AR onboarding or termination procedure unchanged since the rules were introduced.
Jane Savidge, Interim Head of Department for Appointed Representatives, commended some firms for embedding the rules well, but criticised the "bare minimum" approach taken by others, reaffirming: "Principals must have clear, written AR agreements from the outset and effectively monitor their ARs to make sure they act within scope".
The takeaway: if you are a principal firm, adhere to these guidelines.
If your firm is considering becoming a principal to ARs – think very carefully about the monitoring and be warned, it is no tick-box exercise. The AR regime should not be considered "regulation lite".
UK / Regulatory Update / Retail Disclosure
Update on PRIIPs reform – regulatory forbearance for investment trusts
As part of the UK government's continued initiative to reform UK financial services regulation, there is a stated intention to repeal the Packaged Retail and Insurancebased Investment Products ("PRIIPs") Regulation.
Introduced in January 2018 as part of the EU legislative framework, and onshored into the UK framework post-Brexit, PRIIPs is a framework for standardising retail disclosure statements. The government concluded that PRIIPs has considerable flaws - for example, it has not led to increased consumer understanding and is costly to produce – and should be replaced.
The government has announced it will, in the second half of 2024, lay the legislation to exempt closed-ended UK-listed investment funds (investment trusts) from the requirements of the current PRIIPs Regulation. This is an interim measure pending replacing PRIIPs with a new framework for Consumer Composite Investments which is expected to be in place in H1, 2025.
In the light of this, the FCA has advised that until the legislation affecting investment trusts comes into effect, investment trusts may choose not to follow the requirements of the PRIIPs Regulation and associated technical standards.
In addition, they may choose not to follow MiFID disclosure requirements related to the aggregation of all costs and charges associated with the manufacturing and managing of an investment trust, and the requirement to inform clients about any other costs or associated charges related to the investment trust that may not have been included in the PRIIPs Key Information Document ("KID").
The FCA confirms that it will not take supervisory or enforcement action if a fund chooses not to follow those requirements.
However, the FCA also advises that fund distributors should continue to be mindful of other regulatory obligations, such as ensuring communications are fair, clear and not misleading, and of product governance requirements.
To view the full article click here
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.
