UK’s new Financial Conduct Authority likely to target asset managers, says Charles Russell partner Eve Ellis

Eve Ellis, partner at Charles Russell LLP, says that regulatory oversight of asset managers in the UK market is set to change considerably when responsibility shifts from the FSA to the Financial Conduct Authority.

According to the FSA, there are approximately 1,000 asset management firms in the UK which between them manage approximately £4.8trn of assets.

This statistic highlights the vital role which the industry plays within the UK economy. However, its size also means that it is likely to be the subject of FSA scrutiny. Since the financial crisis, there has been increased focus on the regulation of the financial services industry.

Whilst a significant amount of this has been focussed on the banking sector (and this remains the case), the asset management sector has not escaped the attention of the regulator and this is set to increase over the next year.

Now more than ever it is critical that asset managers have effective systems and controls in place to ensure compliance with the relevant rules which are being enforced with more regularity. This needs to be considered against the backdrop of the impending regulatory reform of financial services in the UK.

In April the FSA will be divided into two separate bodies: the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). Broadly, the PRA will be responsible for the prudential regulation of banks, building societies, insurers and investment firms of systemic importance, while the FCA will be responsible for the financial conduct regulation of all other financial services firms (which will comprise the majority of asset managers).

The three key operational objectives of the FCA will be to ensure consumer protection, market integrity and competition in the interests of consumers. The first two objectives will be familiar concepts. However, the third objective has not been part of the remit of the FSA, and will be a key focus for the FCA. It will entail identifying and addressing the role of competition in protecting consumer interests in the market.

Along with structural reform, there will be a change in ethos and approach. The FSA has said that the FCA will be a more proactive, interactive and forward-looking regulator than the FSA, which will involve a judgment led approach intended to prevent, rather than respond to, customer detriment.

The question remains whether the regulatory reform is merely cosmetic, or whether there will be substantive change in financial services regulation. The reform could arguably be considered a mere rebranding; the FCA will be made up of the same staff carrying out the same or similar functions as in the FSA.

But even if this is the case, it appears to have given the regulator the impetus to toughen up and be more proactive. For example, the FCA will have new powers in relation to product suitability. If these are used, asset managers can expect a more interventionist and intrusive approach in protecting consumer interests.

What is clear is that there are areas of concern which the FSA (and its successor the FCA) will focus on in the context of asset management.

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