The Financial Conduct Authority is seeking views on how it should update the regime for asset managers. It also wants to promote innovation and new technologies, in line with a new secondary objective proposed for the regulator, which is to support the UK financial market’s competitiveness and growth.  

 

Under the Future Regulatory Framework published in December last year, the government proposed making the FCA responsible for those retained EU laws that set requirements for regulated firms, meaning the FCA will need to decide whether to adopt the same rules.  

 

A new discussion paper published on Monday now seeks “a broad range of views about the current UK regime for regulating funds and asset managers” and sets out the regulator’s ideas about how it could change the regime. 

 

The FCA sees the paper as an opportunity to hear from industry and other stakeholders what changes they would like to see and which areas it should prioritise. The work will also serve to harmonise rules where they differ between similarly regulated areas.  

 

The regulator said it is unlikely that it will take all its proposals forward, believing the changes will happen as an evolution, rather than a revolution. The proposals include, among others, making the requirements on portfolio managers of funds clearer, or setting minimum contractual requirements between host AFMs and portfolio managers. 

 

Other areas appear to be more firmed up, such as on liquidity stress testing. The watchdog said it wants to see fund managers carrying out effective liquidity risk management and plans to convert the liquidity stress testing guidelines issued by the European Securities and Markets Authority into rules in its Handbook. It is also considering removing or significantly restricting the limitation around liquidity stress testing in the Handbook “so that the qualification ‘where appropriate’ does not give fund managers a reason not to carry out stress tests”. 

 

The comments come in the wake of a liquidity crisis in gilts markets last autumn which left many defined benefit pension funds scrambling to keep their interest rate hedging and even prompted the intervention of the Bank of England as a buyer of gilts. 

 

    

Due diligence is also under scrutiny after “we have seen investments made in illiquid or complex securities without significant due diligence". The regulator is therefore “considering whether it would be better to set out regulatory expectations around investment due diligence for all types of asset management activity”. 

 

 

As it reviews its asset management rules, the FCA will need to keep its proposed new international competitiveness objective in mind, which is included in the financial services and markets bill. Among others, the FCA noted it should have regard to “the government’s support of innovation and new developments in financial markets and active embracing of the use of new technology in financial services, such as crypto technologies, artificial intelligence and machine learning”. 

 

The competitiveness objective is seen by many as controversial, including, seemingly, by the FCA’s chief executive Nikhil Rathi, since it can run counter to consumer protection.  

 

In November last year, Rathi told peers that “we prohibited crypto derivatives in the UK, including leveraged products. We have taken quite a bit of heat for doing that—this is an interesting conversation about the secondary competitiveness objective coming into play in the regulatory framework—from people saying that we are allowing this innovative activity to move to other jurisdictions, and that other jurisdictions are stealing a march on the UK and are able to manufacture and distribute products that should be centred here.” 

 

He added at the time: “We stand behind that decision, along with the decision about prohibiting platforms where we were concerned about money laundering that have gone to other jurisdictions. That also requires us to have parliamentary and political support when we take those robust decisions, because we will get criticised for taking a tougher line than some of our colleagues in other jurisdictions.” 

 

However, in the newly published paper, the FCA also notes that it does not want to create “unnecessary complexity” for companies that operate internationally, saying that if it does change regulation of the sector, it will make sure the changes will better meet the needs of investors, enable technological development, and that they are consistent with international standards. 

 

 

Kevin Doran, managing director of retail investment platform AJ Bell Investments, welcomed the discussion paper saying: “Today's release from the FCA is one of those rare birds in the industry of a genuine consultation. With no cemented new proposals put forward, the next three months should give the industry the time to fly a kite on some Brexit dividend proposals.” 

 

Doran said it was unfortunate that the paper overlaps with the financial sector having to complete the Consumer Duty project by the end of April, “but any opportunity to progress some of the more archaic practices within the industry should be seized with both hands”. 

Leonard Ng, a partner at law firm Sidley Austin in London, said the UK’s asset management regulatory regime was the product of decades of EU policy and legislation under the AIFMD, UCITS Directive and MiFID, each in turn having been updated individually over time. 

"With the UK no longer in the EU, it makes perfect sense to try and create an overarching asset management regulatory framework that will not only make the rules easier for asset managers to follow, but also improve investor protection by applying consistent standards across manager types," said Ng.
 
He added: "That said, the UK should be sensitive to the likely high costs and disruption that would result from a major overhaul of its asset management regulatory framework, and ensure that industry voices are heard in this process.”

 

The regulator plans to engage with a wide range of stakeholders in forums and roundtables, as well as individual meetings. The discussion paper closes for input on 22 May. 

 

What should the FCA prioritise in its look at asset management rules?