The Financial Conduct Authority (FCA), at its annual Asset Management Conference on 30 October 2013, set out a 'new deal' for the asset management industry. The regulator expressed its intention to help facilitate business growth and reinforce the UK's importance in the global asset management industry, while expecting in return that asset managers support the FCA in its desire to see an industry that is fair, transparent and competitive. In particular, the FCA was clear that asset managers must put consumers at the heart of their business models and manage costs with as much tenacity as they produce returns. This blog post sets out an overview of key topics discussed at the Conference.
Use of dealing commission
Martin Wheatley's keynote speech launched a debate on how asset managers exercise their agency responsibilities when using dealing commission to pay for research.
This follows concerns by the FCA that the current regime has a number of flaws, including:
- the definition of eligible research is ambiguous, such that firms may inappropriately pay for services with client commission that do not always meet the spirit of the rules;
- the practice of linking research to trading activity and the lack of itemised pricing of research services weakens the incentives for asset managers to control the use of dealing commission as effectively as they control their own costs; and
- the bundling of eligible research with other services may result in an incentive to overprice such research.
To address these issues, the FCA will take the following steps:
- Publication of a consultation paper proposing a clarification of the definition of eligible research, guidance on the fact that corporate access does not constitute eligible research and a requirement for asset managers to only pay through commission for the part of a bundled service that constitutes eligible research or execution services;
- Launch of a thematic review covering dealing commission practices of both the buy and the sell side (planned completion date: Q1 2014); and
- Lead the EU debate and push for change through MiFID II.
In recognition of the fact that change in this area is inevitable, we encourage asset managers to review current practices and contribute to the debate.
Collective Investment Schemes (CIS)
Authorisations
In an effort to improve the competitiveness of the UK asset management sector, the FCA has committed to reduce the authorisation time of 90% of UCITS schemes to six weeks by April 2014. The authorisation time for new Non-UCITS Retail Schemes and Qualified Investor Schemes will be reduced to three months and two months respectively by April 2014 (and to two months and one month respectively by April 2015).
Governance and charges
The FCA's review of how CIS are governed and in particular how charges within CIS are managed is underway and the FCA's findings are expected to be published in 2014. In particular, the FCA disagreed with the industry's focus on net performance, arguing that investors should be able to understand all charges deducted from their investments and to compare them with other CIS.
Liquidity
The FCA recognises that market liquidity has reduced since the financial crisis, putting additional pressures on operators' ability to manage CIS liquidity. It is therefore looking into operators' systems and controls for managing the liquidity of CIS, especially where the assets held by the CIS are not sufficiently liquid to enable redemptions at the promised frequency.
EU Market Infrastructure Regulation (EMIR)
The FCA highlighted certain issues asset managers face in relation to the implementation of EMIR:
- Cross-border equivalence: Asset managers face uncertainty as to whether trades cleared by non-EU central counterparties will be seen as fulfilling the EMIR requirements;
- Extraterritoriality: The detailed application of EMIR's extraterritoriality requirements (i.e. on trades between non-EU counterparties) has not been finalised yet;
- Segregation and portability: To bring clarity on segregation and portability options, the CCPs will be required to publish their offerings on their website.
The FCA also made it clear that it will continue its supervisory efforts to ensure asset managers are compliant. After its 2013 EMIR implementation reviews, the FCA plans to carry out further implementation reviews focussing on compliance with the reporting and clearing obligations.
Outsourcing
Following the conference, on 4 November 2013, the FCA published its thematic report on Outsourcing which focuses on how the industry oversees critical outsourced operational services. This report follows on from the FSA's 2012 Dear CEO letter to the industry which highlighted concerns on whether adequate resilience arrangements were in place for the financial failure or severe operational disruption of service providers providing critical outsourced services.
Over the summer, an industry group was formed to look at the issue of outsourcing resilience. The 'Outsourcing Working Group' (OWG) included representatives from asset managers, asset servicers and the Investment Management Association. This group has identified a number of 'considerations' that asset managers could consider on the topic, on the central themes of oversight, exit planning and standardisation. The OWG's final output is due in November 2013.
While the FCA does not endorse the outputs of the OWG, it was clear that the engagement of the industry on this topic was welcomed by the FCA and was set out as a model of engagement that it hopes to see on other topics going forward. The FCA is now expecting asset managers to review outsourcing arrangements and where appropriate:
- enhance contingency plans taking into account industry-led 'guiding principles' where applicable; and
- assess the effectiveness of oversight arrangements, making sure 'required expertise' is in place.
The FCA has highlighted that if insufficient progress is made by the industry, further policy action may be considered.
Capital Requirements Directive (CRD IV)
Asset managers are reminded that the CRD IV / Capital Requirements Regulation (CRR) become effective on 1 January 2014.
If not already done so, firms should consider their obligations under the new prudential regime as a matter of urgency. In particular, asset managers should determine whether their regulated activities/services bring them within the scope of CRD IV/CRR and which part of the handbook applies to them (e.g. BIPRU/IFPRU).
The FCA is expecting to issue a policy statement in December 2013.
Anti-money laundering (AML) and anti-bribery and corruption (ABC)
The FCA published it's Thematic Review on AML and ABC Systems and Controls: Asset Management and Platform Firms on 31 October 2013. Deloitte was engaged to assist the FCA with this review, including assessing the arrangements in place at the sample of 22 firms. This was the first time these areas have been looked at thematically in the sector. To find out more about the review, please read our blog post.
For more information from our investment management practice visit www.Deloitte.co.uk/IM.
Panos Pallikaropoulos
Panos is a director in Deloitte's Investment Management and
Private Equity group. During his 12 years with the firm, Panos has
provided regulatory advisory services to a number of investment
managers, custodians and platform providers. LinkedIn
Sandrine Frison, CFA
Sandrine is a senior manager in Deloitte's Investment
Management and Private Equity group. She has been providing
regulatory advisory services to investment and wealth managers
across Europe for over seven years. Her areas of expertise include
investment processes and regulations. LinkedIn
Philip Nicholls
Philip is a senior manager in Deloitte's Risk and
Regulation practice. He joined the practice in 2011 with a broad
background in both prudential and conduct regulation across the
investment management and wholesale banking sectors, having spent
over five years as a frontline FSA supervisor. LinkedIn
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