Investment management update - February 2017

23 February 2017

In this issue: OSCO Final Report on Loan Funds; FRC to review the UK Corporate Governance Code; and Funding of the Financial Services Compensation Scheme.

Quick links:

20.02.2017 - OSCO Final Report on Loan Funds

The International Organization of Securities Commissions (IOSCO) has published its Final Report on the findings of its survey on loan funds.  The survey took the form of a questionnaire issued in December 2015 to gather information from various jurisdictions on existing practices and experience in relation to loan funds.

The Report outlines two types of loan fund - a Loan Originating Fund whose strategy allows it to grant, restructure and acquire loans; and a Loan Participating Fund that can acquire and restructure partially or entirely existing loans originated by banks and other institutions, either directly from the lender or on secondary markets.

These funds comprise both open-ended and closed-ended funds, and are marketed to both retail and professional investors.

Based on the findings of the IOSCO survey, the Report presents the current state of affairs regarding loan funds and identifies the following risks associated with these funds -

  • Liquidity risk: loans are hard to value and, since they are also hard to trade, they are very illiquid assets;
  • Credit risks: the risk of a default of the borrower;
  • Systemic risks from excessive credit growth; and
  • Regulatory arbitrage.

Despite the risks, many jurisdictions consider their general rules for funds to be sufficient to address the particular characteristics of loan funds and therefore the Report concludes that further work on loan funds is not warranted at this stage. The Report notes, however, that IOSCO will continue to monitor this segment of the fund industry with a view to possibly revisiting it for further work, depending on market developments.

16.02.2017 - FRC to review the UK Corporate Governance Code

The Financial Reporting Council (FRC) has announced plans for a fundamental review of the UK Corporate Governance Code.  The review will consider the Government’s Green Paper on how to improve corporate governance, published in November last year, and the inquiry undertaken by the Business Energy and Industrial Strategy Select Committee.

The review will reflect on the appropriate balance between the Code’s principles and provisions, and the growing demands on the corporate governance framework. The FRC will seek input from a wide range of stakeholders, including the Stakeholder Advisory Panel of high profile representatives from a wide variety of sectors. The FRC’s response to the Green Paper will highlight the importance of helping boards take better account of stakeholder views, linking executive remuneration with performance, and extending the FRC’s enforcement powers to ensure that disciplinary action can be taken against all directors where there have been financial reporting breaches (currently the regulator is only able to fine and ban individuals who are members of professional bodies). The Chairman of the FRC has emphasised however, that the pursuit of any of these changes will not diminish the current strengths of UK governance, including, the unitary board, strong shareholder rights, and the role of stewardship.

The FRC will commence a consultation on its proposals later this year, based on the outcome of the review and the Government’s response to its Green Paper.

23.02.2017 - Funding of the Financial Services Compensation Scheme

FCA has issued a special edition of its periodic Regulation Round up, dealing exclusively with FCA’s recent consultation on the future funding of the Financial Services Compensation Scheme (FSCS) (CP16/42).

In relation to investment managers FCA discusses possible changes to the structure of the FSCS funding classes and proposals for introducing product provider contributions; and consults on changes to the way claims about investment management should be treated.

The consultation is open for comment until 31 March 2017 and FCA expects to publish final rules and a further Consultation Paper in Autumn 2017 on proposed rule changes in areas where FCA has set out a range of options.