Investment management update - May 2019

08 May 2019

A round-up of recent legal and regulatory developments of interest to the investment management sector.

This issue includes:



Future of financial conduct regulation: FCA speech

The Financial Conduct Authority (FCA) has published a speech by Andrew Bailey, Chief Executive of the FCA, on the future of the financial conduct regulation. In his speech, Mr Bailey uses four “lenses” to look at the approach to conduct regulation:

  • any debate on the future of regulation needs to take place in a public interest framework – regulation is a public good as benefits are open to all and can be consumed by all. Public interest is the anchor for regulation;
  • using regulation to enable change that is consistent with the FCA’s public policy objectives – this has the potential to further re-shape the nature of regulation, particularly obvious in the areas of FinTech and innovation;
  • Brexit and the importance of a transition period – in a post-Brexit landscape, the future UK regulatory system would take on board practical experience more rapidly. It would be based more on principles that emerge from experience in public policy and less on detailed rules that tend to become set in stone. There is a need to reflect on what it means to have an outcomes-based regulatory system; and
  • having clear principles – the FCA intends to undertake further work to examine its Principles for Businesses to enhance their practical impact, as the Principles are the bedrock of the FCA’s regulation. The FCA will also consider the most efficient and proportionate options for achieving the substance of a duty of care.

Mr Bailey concludes the speech by stating that the future of financial conduct regulation means striving for strong and open markets and having sustainable growth as well the innovation that benefits consumers.

A new duty of care: FCA’s feedback statement

Following the publication of the discussion paper "A duty of care and potential alternative approaches" in July 2018, the FCA has published a feedback statement (FS19/2) (FS) summarising the responses it had received. Some stakeholders suggested that the FCA should introduce a duty of care to reduce harm and ensure that firms avoid conflicts of interest, as well as supporting firms’ longer-term cultural change. 

However, others noted that the existing FCA rules already provide customers with sufficient protection and imposes the same requirements on firms as a duty of care would, for example, the Senior Managers and Certification Regime. The FS sets out stakeholder views according to main themes and explains the steps the FCA will take to consider them further. Against the backdrop of conflicting concerns, the FS considers the following areas: 

  • the case for change;
  • a new duty;
  • a statutory duty of care;
  • revising the Principles for Businesses;
  • private right of action for breaches of the Principles;
  • a fiduciary duty;
  • how the FCA uses the existing regulatory framework; and
  • culture change and whether this is beyond the reach of the regulator.

The FCA will publish a further paper in autumn 2019 seeking detailed views on specific options for change. It will also continue its work on culture in financial services firms.

Promoting innovation in financial services: FCA evaluates Innovate progress and outlines next steps

The FCA has published a speech by Christopher Woolard, Executive Director of Strategy and Competition at the FCA, on the FCA’s innovation journey. In his speech, Mr Woolard outlines the success of Project Innovate and how it has grown since its inception in 2014. There is also a focus on innovation on an international scale and how firms are keen to expand their footprint beyond the domestic market. The establishment of the Global Financial Innovation Network (GFIN) is seen as an example of addressing global needs and challenges. Mr Woolard notes that the FCA is investing time and resource into exploring how technology can be used for public good. Further information on the progress of Innovate can be found in the FCA’s evaluation report "The impact and effectiveness of Innovate".

Alongside the speech, the FCA has also published the following:

  • a new webpage announcing the nine successful firms that have been accepted to the Green FinTech Challenge;
  • a new webpage announcing the 29 businesses that have been accepted into the fifth cohort of the regulatory sandbox; and
  • a new webpage on next steps in relation to the GFIN cross-border testing pilot.

FCA Mission: approach to supervision and enforcement

As part of its Mission, the FCA has published its approach to supervision and enforcement. These form part of a series of documents that the FCA had committed to publish to explain its approach to regulation in more depth. The documents articulate how the FCA carries out its main activities, aiming to provide transparency to its thought process and decision making.

  • Supervision – the FCA Mission: approach to supervision document explains the purpose of, and the FCA’s approach to, supervising firms and individuals and the public value it delivers. It outlines the FCA’s role in ensuring fair and honest markets, why and how the FCA prioritises its supervision work and how, in practice the FCA supervises the firms and individuals it regulates.
  • Enforcement – the FCA Mission: approach to enforcement outlines the FCA’s approach to enforcement and how this aligns with its Mission. The paper explains how the FCA addresses harm and adds public value through the use of its statutory powers to investigate and, where appropriate, take civil, criminal and/or disciplinary action where there has been a contravention. Examples of contravention include the commission of a criminal offence or a breach of the FCA’s principles and rules. The overriding principle in the FCA’s approach to enforcement is substantive justice.

Annex 1 of both papers contains the feedback statement to the consultations the FCA had launched on an initial version of the documents in March 2018.

FSCS final levy for 2019/20

The Financial Services Compensation Scheme (FSCS) has announced its levy for 2019/20. The FSCS will levy firms £532m this year, £16m more than it forecast in its plan and budget 2019/20 in January. As in 2018/19, the main driver of the compensation costs falling on FSCS this year will continue to be pension claims. The increase of £16m between the forecast and the final levy is due to the uplift in the number of claims expected against self-invested personal pension (SIPP) operators and a revision to the expected continuing costs involved in some insurance companies’ failures.

RDR and FAMR: FCA call for input

The FCA has published a call for input on the evaluation of the Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR). The RDR and FAMR initiatives, introduced in December 2012 and August 2015 respectively, aim to improve the distribution of retail financial services products. The FCA committed to reviewing the initiatives in 2019 in its 2018/19 Business Plan and the call for input marks the review’s launch. The FCA will be reviewing the impact of the RDR and FAMR on the market to date and assess how the market may develop in the future.

The call for input:

  • provides background information on the RDR and FAMR;
  • outlines the FCA’s approach to assessing the initiatives against their outcomes and indicators;
  • invites feedback on consumer needs from advice and guidance services;
  • asks for views on market changes that have, or will have, an impact on how consumers engage with financial advice and guidance; and
  • sets out the FCA’s planned next steps.

The deadline for submitting responses is 3 June 2019. The responses will inform the FCA’s review and the additional research it will carry out during 2019. The FCA intends to publish its findings in 2020.