Investment Management Update
- FCA speech - where next for investment management regulation?
- FCA guidance following recommendations of FAMR
- Commission proposes new powers for European Supervisory Authorities
- Possible reforms to the Global LEI System
Megan Butler, FCA’s Executive Director of Supervision – Investment, Wholesale and Specialist, has delivered a speech on the way ahead for regulation of the investment management industry.
Noting that the industry was one of the sectors “that we care deeply about”, Ms Butler referred to the Asset Management Market Study and the need to improve competition and announced the launch of an asset management authorisation hub aimed at reducing barriers to entry and supporting new entrants into the market.
The hub is intended to assist start-ups as they move between pre-authorisation and authorisation, and on to regular supervision and will be a user friendly system of support based on four principal objectives, which are to:
- clarify expectations - and support firms with better guidance on regulations and processes;
- make information easier to access via a dedicated portal for investment managers on the FCA website;
- foster more positive, personalised engagement between the FCA and market entrants; and
- provide end-to-end support for firms moving through the start-up cycle.
Separately, under the heading “Our priorities for you” Ms Butler made the general comment that FCA expects firms to put an onus on positive customer outcomes and basic integrity, and called on firms to ask themselves five basic conduct questions:
- What proactive steps do you take to identify conduct risks in your business?
- How do you encourage people in front, middle, back office, control and support functions to feel responsible for managing conduct?
- What support do you put in place to help your people improve the conduct of their business or function?
- How do your board and executive committee get oversight of conduct in your organisation?
- Have you looked at whether there are any business activities you are engaged in that undermine your work to improve conduct?
The FCA considers that taken together these questions offer a useful way for firms to think about managing conduct risks.
The FCA has issued Finalised Guidance in response to two of the recommendations included in the Financial Advice Market Review (FAMR) final report of March 2016.
The guidance can be split into two parts. The first part addresses specific recommendations made by FAMR on streamlined advice and the related fact find process. The second part clarifies and reintroduces earlier guidance.
The new guidance will be most relevant for a firm providing streamlined advice on a financial instrument or retail investment product.
Guidance in response to specific FAMR recommendations
The FAMR report describes streamlined advice as "a term used to collectively describe advisory services that provide a personal recommendation that is limited to one or more of a client’s specific needs." In the finalised guidance the term "streamlined advice" includes both simplified and focused advice.
The paper offers advice on how a firm can engineer a well-designed process for offering streamlined advice. This emphasises the importance of developing the process to suit the relevant client. Accordingly, the FCA recommends identifying target clients and using a filtering process of their choice to remove clients that would not be suitable for the advice process. Recommendations are also offered with regards to collecting and using information about clients. There is a section at the end which presents examples and case studies to demonstrate how to put this advice into practice.
Fact find process
In the finalised guidance the FCA uses the term "fact find" to encompass gathering the necessary information about the client to make suitable recommendations. This process is often lengthy which can provide a barrier for consumers due to the cost and inconvenience. The FCA offers tips on how to reduce the timescale; these include utilising technology and requesting that the clients provide some of the information prior to a meeting with the firm.
Guidance incorporated from FG12/10 and FG15/1
The FCA has also taken the opportunity to adopt some of the non-handbook guidance from Finalised Guidance 12/10 and Finalised Guidance 15/1, both of which are now redundant, other than the areas restated in this new guidance. The FCA cherry-picks from the advice and adjusts it to reflect the current regulatory regime. The specific areas addressed include adviser charging, complaints, professional standards and the requirements on appropriateness regarding MiFID.
The European Commission has published proposals for legal changes which would give the European Supervisory Authorities (ESAs) enhanced responsibility for financial market supervision and, conversely, reduce the relative importance of national regulators. The ESAs comprise the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Market Authority (ESMA). Of the three ESAs, ESMA has the most direct impact on funds and fund managers.
The Commission has proposed three major changes to ESMA: new direct powers, the creation of an “executive board” and increased funding.
In terms of new powers, the Commission has proposed that:
- ESMA should be the single supervisory body for European venture capital funds, European social entrepreneurship funds and European long term investment funds, and will have the power to conduct investigations and undertake on-site inspections;
- ESMA must be notified by the relevant national competent authority where the national competent authority intends to authorise or register an entity with a business plan that includes the “outsourcing or delegation of a material part of its activities or any of the key functions or the risk transfer of a material part of its activities into third countries, to benefit from the EU passport while essentially performing substantial activities or functions outside the Union” (emphasis from original). Note that this does not affect delegation structures among EU domiciled entities; and
- ESMA can collect information directly from market participants and may impose penalties and fines if it finds that the market participant intentionally or negligently failed to provide information, or has provided incomplete, incorrect or misleading information.
In order to increase ESMA’s funding, the Commission has suggested that ESMA receive annual contributions from financial institutions that are indirectly supervised by ESMA, as well as EU contributions and supervisory fees paid by financial institutions that are directly supervised by ESMA.
Certain changes to ESMA’s board are also suggested to streamline decision-making.
The feedback period on the changes will close on 23 November 2017.
The Legal Entity Identifier (LEI) is a 20-character code that identifies legally distinct entities that engage in financial transactions. It identifies reference data such as the name and legal address of the entity. The LEI is used in more than 40 jurisdictions to support the reporting of financial transactions, other public sector uses and, more generally, the LEI is used by market participants to support reliable management of data on legal entities.
The LEI Regulatory Oversight Committee (LEI ROC) has now published a Consultation Document regarding proposals proposing to update the way relationships affecting funds are recorded in the Global LEI System (GLEIS).
It is proposed to replace the current optional reporting of a single "fund family" relationship as part of Level 1 (reference data of the entity) with the following four relationships, as part of Level 2 data (relationship data):
- "Fund Management Entity" - a legal entity whose regular business is managing one or more investment funds (possibly distinguishing a main Fund Management Entity from other Fund Management Entities involved in the management of the same fund). Funds would have to provide this information to receive or renew an LEI. An entity would report if it is a fund, and this information would be recorded as part of the public reference data of the entity, subject to challenge by third parties.
- "Umbrella Funds" relationship - where an investment fund has one or more than one sub-funds / compartments where all sub-funds/compartments have a common (Main) Fund Management Entity and each sub-fund / compartment has its own investment objectives, separate investment policies and strategies, segregation of assets, separate investors and where an investment fund has segregated liability between sub-funds / compartments.
- "Master-Feeder" relationship - where a Feeder Fund is exclusively, or almost exclusively, invested in a single other fund, or several funds that have identical investment strategies referred to as a Master Fund (or Master Funds).
- "Other Fund Family" – this would capture family relationships not captured above. Reporting this relationship would be optional.
Responses are invited by 26 November 2017.