Investment Management Update

In this issue: ESMA review of home and host responsibilities under AIFMD and UCITS; FCA publishes business plan for 2017/18; and April 2017 Financial Advice Market Review - Progress.

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07.04.2017 - ESMA review of home and host responsibilities under AIFMD and UCITS

In 2016 ESMA commenced a review of the operation of home and host responsibilities under the Alternative Investment Fund Directive (AIFMD) and the Undertakings for Collective Investments in Transferable Schemes Directive (UCITS). The aim of the exercise was to review and facilitate the operation of EU marketing passports, assessing the notification frameworks in AIFMD and the UCITS Directive.

The findings of this review have now been published and include the following key points:

  • The use of marketing passporting frameworks varies across EU member states and usage is broadly consistent with both the size of the national fund market and the share of a member state in the single European market.
  • This is also consistent with the use of AIFM passporting frameworks, although the findings showed that AIFMs make use of AIFMD passports to a lesser extent than under UCITS.
  • The report includes a summary of difficulties linked with the day-to-day operation of the UCITS and AIFMD passporting frameworks, which were identified by competent authorities in the context of the review.

ESMA acknowledges that difficulties which were uncovered with day-to-day operations of passporting frameworks are outside the scope of the thematic review, however further work will be carried out to address these issues, alongside the work done by the European Commission on barriers to cross-border distribution of funds.

18.04.2017 - FCA publishes business plan for 2017/18

The FCA has published its business plan setting out the activities that it intends to carry out in 2017/18, with the following key areas of focus:

  • firm culture and governance;
  • financial crime and anti-money laundering;
  • promoting competition and innovation;
  • technological change and resilience;
  • treatment of existing customers; and
  • consumer vulnerability and access to financial services.

Within the business plan, the FCA has published its sector priorities for 2017, which highlight the issues and developments which the FCA sees in the sectors it regulates.

Investment Management Highlights:

  • weak price competition causing investors to pay too much for investment management services;
  • weak governance leading to poor product design and weak oversight portfolios;
  • unidentified or poorly managed conflicts of interest causing harm to portfolio operators and end-investors;
  • poor advice from investment consultants resulting in institutional investors making investment decisions that do not meet their needs;
  • poor liquidity management in investment funds creating risks of consumer detriment or wider disruptions to the financial system in stressed market conditions;
  • disorderly failure of investment portfolios and market abuse disrupting trust in the financial system; and
  • providers of critical services to the sector, including custody banks, not meeting current service standards or ensure continuity of service.

The FCA’s key planned activities with regard to investment management include:

  • publishing its final report to the Asset Management Market Study outlining whether competition is working effectively in this sector;
  • review its policy options and the available tools that asset managers have to manage liquidity when facing redemptions and valuation issues.; and
  • planning a number of interventions in the custody bank sector, evaluating critical infrastructures in firms, evaluating custody banks’ resilience and resistance to cyber-attacks and evaluating the quality of product governance and controls at firms.

Retail Investment Highlights

  • investors with modest means may lack access to, or awareness of, advice that could benefit them;
  • financial advisers may give insufficient attention to the total cost of investment products and of advice, which results in poor value for money for consumers;
  • some self-directed investors are at risk of receiving products inappropriate for their risk appetite and capacity or receiving poor value for money;
  • firms do not always consider consumers’ needs and outcomes appropriately when they develop products, distribution propositions, and offer wealth management services;
  • consumers are vulnerable to unexpected financial losses, including scams and fraud, from behavioural biases and difficulties assessing information;
  • some peer-to-peer and crowdfunding firms may not be complying with CASS requirements, putting consumers’ funds at risk; and
  • consumers might receive unsuitable investment advice.

The FCA’s key planned activities with regard to retail investments include:

  • publishing final guidance later in 2017 with regards to its Financial Advice Market Review, which commenced in light of concerns that the market was not working well for consumers.;
  • completing its project to identify the areas where problems in providing suitable advice and disclosure are most common. The project will show the FCA where firms might be providing good or poor advice, further shaping its future focus;
  • conducting a market study to explore how ‘direct to consumer’ and intermediated investment platforms compete to win new and retain existing customers. The study will explore whether platforms enable retail investors to access investment products that offer value for money.
  • assess the developing market of automated advice models, monitoring developments and reviewing models that are already providing automated advice, as well as new entrants to the market;
  • ensuring that contracts for differences (CFDs) are sold and distributed to a suitable target market and that retail clients are provided a proportionate level of protection. A policy statement will be published later in 2017 to limit the risks of CFDs and improve the conduct of firms; and
  • ensuring that peer-to-peer and crowdfunding firms comply with client money requirements.

April 2017 Financial Advice Market Review - Progress

The FCA and HM Treasury have published a progress report on the Financial Advice Market Review (FAMR).

The FAMR’s final report, published in March 2016, set out 28 recommendations intended to tackle the barriers to consumers accessing advice and to foster a market with the following characteristics:

  • good availability of affordable, high quality advice and guidance, which supports consumers at all stages of their lives;
  • greater innovation in the interests of consumers, encouraged by a flexible and well-understood regulatory framework for advice;
  • a range of channels through which consumers are able to access advice and guidance, including in the workplace, and appropriate flexibility in the way consumers are able to pay for advice; and
  • consumers that are engaged with their own financial affairs and so seeking out the advice and guidance they need.

Most of the recommendations centred around affordability and accessibility of financial advice and the liability of advisors and consumer redress. The Progress Report indicates that work on all the recommendations is underway, some with consultation in progress, a number described as “on track” and some already completed, including the formation of a Financial Advice Working Group (FAWG).

The FAWG has itself published three reports on “Rules of Thumb and Nudges: Improving the Financial well-being of UK Consumers”; “Financial well-being in the Workplace: a way Forward”; and “Consumer Expectations of “advice” and “guidance”.”

In the meantime, the FCA has also issued Guidance Consultation GC17/4 on implementation of FAMR.