Corporate

On 20 January the FCA published a “Dear CEO” Letter for asset management businesses setting out their supervision strategy for the sector  (click here for a copy)

Progress required

Commenting that

The asset management sector plays a critical role in the UK economy and in overseeing the savings and investments of millions of individuals across the UK and beyond. The sector is growing and changing in significant ways, but its purpose remains unchanged: to protect and grow the capital of its customers and to oversee their investments effectively over the long term. To deliver this, you must act in the best interests of your customers

the FCA explained that further progress is needed for the sector to deliver that purpose effectively.  Points of particular concern included:

  • Overall standards of governance, particularly at the level of the regulated entity, generally fell below their expectations.
  • Funds offered to retail investors did not consistently deliver good value, frequently due to failure to identify and manage conflicts of interest.
  • Inadequate investment in technology and operational resilience had led to deficient systems which could cause harm to market integrity or loss of sensitive data.

Supervisory Priorities

The FCA has set out the following supervisory priorities to focus on these issues.

Firms’ governance

Firms are urged to ensure that their authorised fund manager (AFM) boards are providing “robust discussion and challenge around important business decisions, without undue reliance on Group structures” and to focus on areas of conflict.

Authorised funds managed by fund managers that are not within the group structure of the delegate investment manager (often known as ‘host’ Authorised Corporate Directors or Host ACDs) are a particular focus. The FCA has noted that a conflict of interest may arise if the ‘host’ ACDs cannot oversee the fund properly because, for example, it is concerned to avoid a loss of revenue from the investment manager if it were to offer more assertive challenge. The FCA has expressed concern that some ‘host’ ACDs may not be undertaking their responsibilities effectively, leading to poor value products and them failing to ensure risks are properly managed. In parallel with its product governance review described below, the FCA will be reviewing the effectiveness of ‘host’ ACDs, including as regards oversight of the day-to-day management of the fund.

Following the extension of the Senior Managers & Certification Regime (SMCR) to this sector on 9 December 2019 (click here for our latest update) the FCA expects firms to have refreshed their approach to governance and taken steps to meet SMCR requirements. The FCA will be carrying out work in the first half of 2020 to evaluate the effectiveness of governance across the sector, focusing particularly on firms’ efforts to implement SMCR.

Value Assessments:

The FCA commented on a number of rule changes introduced following the summer completion of its Asset Management Market Study (AMMS), particularly those requiring value assessments of authorised funds noting that:

“Conducting the value assessments on your funds, when done properly, could result in substantial improvements to outcomes for investors. Conversely, and as you may have seen in our recent press release, we will continue to take robust action where we identify funds which deliver poor value, including so-called ‘closet trackers.’ ”

FCA plans to conduct studies in the first half of 2020 to understand how effectively firms have undertaken value assessments. It will be seeking evidence of “meaningful challenge at AFM boards on proposals made by the executive – including on costs, fees and product design”.

Further work on the AMMS reforms to evaluate their effectiveness is expected.

Product governance

The FCA wants to see products designed with the best interests of a specified target market in mind and warns that such products should not include features that are manifestly not in the interests of customers. Example given are funds tracking an undisclosed index or fees exceeding target returns. The FCA has begun a review to assess how effectively new product governance requirements flowing from the revised Markets in Financial Instruments Directive (MiFID II) have been implemented across the sector. This is expected to complete in early 2020.

Operational resilience

The FCA expects firms to manage technology and cyber risk appropriately, including through appropriate oversight of third-party firms and intra-group service providers. Firms are directed to the FCA and PRA Consultation paper on Operation Resilience for a proposed approach to strengthen operational resilience. The FCA identifies Asset Managers as having a greater risk of causing harm, therefore they will now be subject to proactive technology reviews and the FCA will be contacting such firms. If a firm suffers material technological failures or cyber-attacks, the FCA has made it clear that it expects to be contacted promptly as part of the Firm’s responsibilities under Principle 11.

Other topics of concern

As well as the above there were further reminders of areas of previously expressed concern including:

  • Brexit Readiness
  • LIBOR transition. The FCA has made clear that firms should plan on the basis that LIBOR will cease from the start of 2022. And are urged to facilitate and contribute to an effective transition to new, more appropriate rates; and
  • Liquidity management where there has been further guidance. Click here for our separate report on this topic.

Points to consider

Clearly the FCA envisages a busy start to 2020. AFMs, and Host ACDs in particular, may wish to critically review any conflicts and consider the effectiveness of their boards. The FCA has made it clear that it wishes to see evidence of “robust challenge” in action.

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Karen Fountain