Cordium’s Jonathan Wilson analyses first year of UK regulator operations

Jonathan Wilson, project director at Cordium, has taken a look at the performance of the UK regulator, the FCA, over its first year of operations.

In the first six months of its existence, there was little evidence that the FCA was pursuing a sustained campaign to improve standards in the asset management industry. Only two out of thirteen thematic reviews listed on the FCA’s website had implications for investment managers.

“Thematic Review 13/10 – Outsourcing in the Asset Management Industry”, published on 6 November 2013, contained the FCA’s findings on its predecessor’s concerns about the industry’s overreliance on a limited number of service providers, often part of large banking groups. The focus of the review seemed to catch the industry with an unexpected problem – one that, in fact, seemed too difficult to resolve and now relies on an industry-led Outsourcing Working Group (“OWG”) to help map the way forward.

The other thematic review was “TR14/1 – Transition Management Review”. The FCA had observed failures in the management of conflicts of interest, poor governance and insufficient oversight. These were across the Transition Management industry and, as a result, it conducted a high-level review to better understand the market. The key findings highlighted the FCA’s concerns around asymmetries of information and the need for improved transparency, a better demonstration and application of the best execution rules, clearer marketing materials and contractual terms, and improved governance.

Enforcement actions

When it comes to enforcement actions, it is clear that the FCA is committed to addressing risks to market integrity and consumers. However, the same trend of a marginal focus on alternative asset managers is evident.

Since last spring, the FCA has only brought one case against a firm in the asset management industry. This was against an administrator for client money breaches – an area the FCA and its predecessor had focused on intensively. It is entirely possible that these enforcement cases were existing issues inherited in the FSA pipeline, and that more time is needed for the FCA’s own enforcement agenda to emerge.

The highest value fine imposed in 2013 was for £105m for Rabobank in relation to misconduct concerning the London Interbank Offered Rate “LIBOR”, a valuable reminder of the gravity of market abuse as a regulatory risk.

Looking to the future
While past thematic and enforcement cases highlight some important points, they do not necessarily provide a guide to future FCA activities. For that, we must look to its annual asset management conference in October 2013, which set out the agenda for the industry.

In his keynote speech, “Shaping the Future in Asset Management”, FCA chief executive Martin Wheatley rallied asset managers to provide greater transparency and better management of conflicts of interest, particularly the inherent conflict represented by bundled research and corporate access services.

Clive Adamson, director of FCA Supervision, mapped out a broader “supervision strategy”, focused on the role of asset managers as “trusted agents” who “do not let conflicts of interest interfere with the best possible decisions” for their clients. He asserted that “asset managers spend their clients’ money as though it was their own, and manage costs with as much tenacity as they produce returns”.

The issues arising from this vision are now emerging. Martin Wheatley announced “Consultation Paper 13/17 – Use of Dealing Commission” in October 2013.

This enabled the FCA to clarify its rules allowing the use of dealing commissions (paid from customers’ funds) to buy execution- and research-related goods and services. Most recently, “Market Watch 45”, published in February 2014, sought to remind firms of their best execution duties under the FCA’s rules in the context of making wholesale markets work well and in the best interests of consumers.

Other matters that asset managers are currently dealing with may well fall within this conduct remit. Issues such as whether AIFMD implementation and service costs can be charged to the funds, the format and content of disclosures in fund documentation, marketing strategies and their consistency with the investment strategy, the quality and accuracy of periodic reporting to investors and the regulator or the independence of risk management functions and of valuation arrangements. These are all issues the FCA expects asset managers to approach from a Conduct perspective.

The supervisory challenge for asset managers, then, is perhaps best summed up in Wheatley’s own words. They are expected to achieve a “cultural transition”, not a hit-list of regulatory topics the FCA publishes periodically, but a way of doing business that ensures right outcomes and “consumers are treated more fairly”.

Firms must focus on corporate governance, transparency and accountability as a priority. They must also ensure that their systems and controls are commensurate with their commercial activities and business model, and fit for an evolving regulatory and legal environment. As for the regulator, expect it to show interest in your business activities, to become “more probing on sources of revenues” to understand “how firms make their money”, and still deliver to consumers’ and the regulators’ expectations.


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