Nick Miller, Head of Investment Management Supervision at the Financial Conduct Authority, spoke to us about The FCA’s view on regulations affecting the traditional and alternative investment management sectors for the Fund Technology, Data & Operations, Europe 2017 Report.
"My department is responsible for all UK regulated asset managers from the familiar global household names to the smallest independent firms, traditional, alternative as well as wealth managers, and outsourcing services, such as those provided by the custody banks.
We consider the sector to be particularly important, which is why our regulatory focus is particularly strong at the moment.
This is for many reasons, not least the fact that we have for some considerable time now been operating in a low interest environment where investors are continuously seeking yield opportunities, and you clearly have a key part to play in delivering that.
More importantly, when we look more long-term at the generational change away from traditional employer funded defined pensions and the increased role of the individual in providing for his/her own lifetime’s financial well-being, it is clear that this sector has a significant role to play in delivering those long-term savings and pension solutions.
We want to see a sector that is dynamic, competitive and innovative in offering a range of value for money products appropriate to all customers whatever their needs and identifies their target market appropriately.
In terms of current regulatory developments I would imagine that close to the top of your list and ours is the Markets in Financial Instruments Directive (MiFID) II. As you are fully aware it is one of the largest programmes of regulatory change that the UK currently faces and is probably the largest programme of regulatory change that the regulator has had to deal with in recent times. It is also a significant exercise for the Financial Conduct Authority (FCA).
It will bring with it fundamental changes to how markets operate across Europe.
The FCA considers MiFID II to be of key importance and the primary reason for this is the steps that it will take to improve transparency across wholesale as well as retail financial markets.
Underlying MiFID II is the recognition of the importance of transparency in how firms undertake their business and deliver their services. Firms will be required to disclose the costs and performance of the products, enabling investors to make better and more informed decisions about their investments because of MiFID requirements. Alongside this is the Packaged Retail and Insurance-based Investment Products (“PRIIPs”) regulation that will provide for similar disclosure, but on the product side rather than the distribution side that MiFID provides for.
One of the most important elements of MiFID, alongside disclosure, is the level, quality and granularity of the data that we will receive through transaction reporting. It is important that the market understands the significance of our role in maintaining the integrity of our markets including scouring the market for market abuse and seeking this out, MiFID II will only increase our armoury in this regard.
As with all regulatory developments there is a cost to MiFID which we acknowledge but we believe these costs to be outweighed by the significant benefits to consumers and trust in the integrity of UK markets that will follow its implementation.
We do want to see transaction reporting recognised as a priority for firms where it is relevant to them.
Alongside this is the Market Abuse Regulation that came in last year and which followed on from the previous Market Abuse Directive. MAR has increased and widened the responsibilities on firms amongst other things to report suspicious activity under the new Suspicious Transaction and order Reports (STOR). This is a change from the previous Suspicious Transaction Reporting (STR) requirement under MAD and we expect all firms both sell side and buy side to be familiar with the new requirements and to submit STOR’s in a timely manner in line with their regulatory obligations.
We do also recognise that MiFID brings some changes to the market. Clearly research and how this is funded is the most obvious element of this and at the moment we are seeing a price discovery mechanism playing out in the market as it assesses the value and price of the different research offerings from brokers and independent houses.
Ultimately, the policy goal is to see a transparent market for research which is very much detached from the execution side. A key goal for us is to break the inducement between research and execution.
We recognise that this is something that we cannot deliver solely within a European context, there is a global element to this and this has been most clearly played out in the debate with the U.S. around the research rules there.
You will have probably seen recent announcements from the European Commission and from the Securities and Exchange Commission (SEC) that they have come out with a reciprocal agreement allowing each other’s rules to continue to play out with a temporary relief for certain elements of those rules from the FCA side. I would encourage you to familiarise yourselves with the key detail reports from the European Commission.
We welcome this outcome wholeheartedly as it is something that we have worked very hard to achieve and there is a statement from us on our website which I would encourage you to read.
Another key focus of regulation on this sector and a significant and generally well received piece of work was the Asset Management Market Study published earlier this year. What we wanted to see was whether the market was working well, particularly from a competition perspective and whether it was delivering competition in the interest of consumers.
The AMMS concluded that disclosures were often poor, investors often lacked an understanding of the charges they faced and indeed, the fact that they were being charged in the first place. The investors’ interests were often not considered when taking decisions around merging and closing funds, and that savings realised from economies of scale were not passed on to the end investors at least in a way that was obvious from the data.
What we want to see is a transparent sector that competes effectively; where good firms are acting as good agents for their clients when in the markets we believe the AMMS has been a very useful piece of reteach in helping us toward delivering on these objectives.
Alongside the final report, we published a consultation paper on a set of remedies. The governance remedies – those that strengthen the duty of fund managers to act in investors best interests – are core elements of this package.
We have consulted on the requirement that fund managers should appoint at least two independent directors on fund boards. We want to see evidence that boards are very actively and explicitly considering fees, charges and value for money when deciding on issues like procurement.
Also, we want to see genuine evidence that poor performance is being challenged and fee structures are being reviewed frequently. On the competition side we have referred the Investment Consultant sector to the Competition and Markets Authority (CMA) and have launched a market study of investment platforms. Some of your firms may have already received data requests
Another important regulatory development is the senior managers and certification regime. This is a regime that currently applies to the banking and, to a certain extent, the insurance sector. We introduced this in March 2016 following the Parliamentary commission on Banking Standards to address the failings that led to the financial crisis of 2008 and led amongst other things to the creation of the FCA and its sister regulator the PRA. The SM&CR, having been successfully implemented across the baking sector, will now be widened to include all financial services firms captured under the Financial Services and Markets Act.
The regime aims to improve standards of conduct across all sectors and to ensure that we are very clear about which senior managers are responsible and accountable, and for what. This will remain unchanged as we extend it more broadly across the population of regulated firms, beyond what we call the dual regulated space, so those firms who are not regulated by the Bank of England (BoE) as well as the FCA.
It is clear there has been a failure of trust in the sector and we need to see this re-established – particularly given the importance of people’s long-term savings and pension provisions. We feel that rolling out the regime is important, as does the government, but what we have recognised is that clearly the move beyond that dual regulated space, the number of firms and business models are vastly different.
You will be aware of the consultation on the extension of the SM&CR that was opened in the summer and closes shortly. What we are trying to do with this regime is to be flexible and proportional to ensure that the different business models and different governance structures across the various sectors is done in a sensible way and delivers the outcomes whilst giving firms some flexibility in precisely how this will be achieved.
I am conscious that this is an operations conference, so I did want to touch on the issue of outsourcing as in some ways it ties in to the rationale of the Senior Managers Regime. We do see lots of outsourcing across this sector which we recognise can bring considerable benefits in flexibility and costs management when used sensibly and prudently. We are also aware that it can bring significant additional risk as well as the benefits outlined.
We would however reiterate that whilst you can delegate responsibility you cannot outsource accountability, so if you are outsourcing a function it is important to recognise that we will hold you accountable for any failings within that outsourcing firm or those outsourcing activities. More importantly any decisions on outsourcing should be for the benefit of your business and your customers and implemented sensibly, prudently, with appropriate oversight, robust controls, sensible service level agreements and a robust exit strategy to address outsource failure.
Looking forward, we do recognise that we have a role to help the sector grow and develop, particularly on a global perspective, so I would mention the Asset Management Authorisation Hub which my colleague and Executive Director of Supervision, Megan Butler, launched last month in a speech at the Financial Times (FT) summit.
The Asset Management Authorisation Hub is designed to ensure that we are as efficient and streamlined as possible in processing applications for new asset managers. This ties to our competition objective by ensuring that we are allowing new entrants to come into the market where they are well governed and subject to appropriate systems and controls, but allows them to do so in a way that is as effective as possible.
The hub is now up and running and we have received our first applications, which are essentially really clear about the kinds of information that we need from firms in order to start that authorisations journey.
We have seen a lot of calls to our contact centre and various queries from firms, and we can do more to help them understand exactly what is required there so we are being very clear about that. We are also giving each firm a dedicated case officer to work with them through this journey, as well as dedicated access to a portal within our website which allows them to view the progress of the application.
Once these firms are through the gateway and the authorisations process, we will work with them to ensure that the supervision is effective during the initial phase of their regulatory life cycle.
Behind all of this is Brexit. I am not going to say a huge amount on this subject except to echo the recent public comments from Andrew Bailey and Megan Butler.
Clearly the concept of delegation and the issue of delegation is something that has been discussed in the press and elsewhere and this is where a fund is delegating portfolio management to an asset manager who may be based in a different jurisdiction and this happens very frequently today.
This is not just a question of whether that jurisdiction happens to be in the EU or not, what we don’t want to see is unnecessary and arbitrary barriers put up to that process. We believe that the situation that is currently applied works and don’t think that membership of the EU determines whether that will be effective.
I would reiterate that the fact that you are all in the regulatory spotlight demonstrates how critical you are to the UK’s prosperity and success. We do want to see a sector that is winning, profitable, sustainable and highly competitive globally."
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