The FCA’s strategic objectives and priorities for the year ahead are set out in its Business Plan for 2019/20 which was published on 17 April 2019. The Business Plan is organised by cross-sector priorities, as well as individual sector priorities.
There are eight cross-sector priorities, which cover the following:
- EU withdrawal and international engagement: supporting a smooth transition post-Brexit in order to maintain market integrity and the protection of consumers.
- Firms’ culture and governance: this is a wide-ranging priority and it includes the extension of the Senior Managers and Certification Regime (SM&CR) to all FCA solo-regulated firms.
- Operational resilience: continuing work and policy proposals in order to increase firms’ abilities to mitigate the risk of and to respond to cyber-attacks.
- Financial crime and anti-money laundering: focusing on tackling fraud, scams and money laundering through intelligence, data strengthening partnerships and raising the standards of professional bodies.
- Fair treatment of existing customers: the FCA plans to monitor pricing practices and price discrimination.
- Innovation, data and data ethics, technology and competition: examining the use of data by firms, and publishing the crypto-assets regulation. The FCA expects to release its policy statement on crypto-assets during summer 2019; it has also just published a consultation on banning the sale, marketing and distribution of derivatives and exchange traded notes referencing crypto-assets to all retail consumers (CP19/22).
- Demographic change: releasing a discussion paper on intergenerational differences (which has now been published), and running the Financial Lives survey again.
- The future of regulation: there are a number of key activities under this priority, including the publication of feedback received on the Duty of Care discussion paper (now published). The FCA has decided further work is necessary on the subject (due to the range of views and complexity of the issues) and expects to publish a further paper in autumn 2019. Other activities concerning the future of regulation will include the use of technology to simplify the FCA Handbook (including a survey of small authorised firms) and commencing an annual statement on regulatory perimeter issues. To this end, the FCA’s first annual report on the perimeter was recently published.
Investment management sector priorities
For the investment management sector, the key concerns are around the pricing and quality of services from providers in three main areas: asset management; institutional intermediaries and advice; and custody and investment administration. Other areas of concern relate to the problems that could arise from the increasing use of automation in the financial services industry and greater outsourcing. These bring industry benefits, but also cause oversight problems and have the potential to threaten stability and resilience across the sector.
The FCA’s focus within this sector is asset management services and, for 2019/20, the main areas to keep abreast of are summarised below.
Operational resilience is treated as a vital part of protecting the UK’s financial system, institutions and consumers, particularly in the face of technological change and the risk of cyber-attack.
The UK regulators (the FCA, the PRA and the Bank of England) plan to release joint proposals later in 2019 in response to the FCA’s Operational Resilience Discussion Paper (published in July). As operational resilience is a matter that investment firm boards and senior management are responsible for, they will need to carefully review this consultation paper when it is released and consider the potential impact on their firm.
The impact of IT system upgrades or data transfers will be studied further. The Business Plan notes that these account for the single highest cause of failure and operational disruption. A report will be produced in 2019/20 setting out next steps.
The other key area for the investment management sector to be mindful of is outsourcing. Concerns exist around the extent of disruption caused by third-party service providers due to IT failures. Critical services can be outsourced, but managing the third parties that provide or support financial services is the firm’s responsibility. The FCA plans a number of activities to identify the sectors and business services which are highly dependent on outsourcing, and to make “the regulatory expectations clearer”.
Asset Management Market Study
The FCA intends to focus on the implementation of new requirements that were introduced following the Asset Management Market Study. These were set out in PS18.8 and strengthen authorised fund managers’ existing duty to act in the best interests of investors. Rules and guidance to improve the information provided to investors was set out in PS19/4. These new requirements come into effect in October 2019.
In addition, the Competition and Markets Authority (CMA) is expected to publish a set of rules later this year following its inquiry into investment consultancy and fiduciary management services. As the regulator of fiduciary management services, the FCA will supervise firms’ compliance with these rules.
Prudential standards aim to minimise the risk of harm to a wide range of stakeholders by helping to ensure that firms manage their business risks responsibly. Prudential regulation governing the exercise of investment services currently stems from the Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR).
Working out the application of CRD/CRR results in a complex map, depending on the services the firm exercises, and their combination or size. While some firms are subject to the full set of CRD/CRR provisions, there are exemptions for some investment firms and a lighter regime for some others.
Since 2017, the EU has been preparing a new framework for the prudential regulation of investment firms to amend the existing prudential framework for these firms (under CRD/CRR and MiFID II). The changes aim to introduce more proportionate and risk-sensitive rules for investment firms. In particular, the revised rules aim to differentiate the prudential regime according to the size, nature and complexity of investment firms. This new EU framework, under the EU Investment Firms Directive and Regulation, is expected to be in operation for 2020/21.
The FCA intends to consult in the second half of 2019 on a new prudential regime for MiFID investment firms that is aligned to this new EU framework. Investment firms will need to consider the new rules, which impact both authorisation and prudential supervision. In addition, reporting requirements will change and firms will need to implement these.
In keeping with its plan, the FCA has now published its final rules (PS19/13) to implement the requirements of the Revised Shareholder Rights Directive. These rules came into effect on 10 June 2019, the deadline for implementation of the Directive in the UK. Improving stewardship within the existing structure of UK capital markets will be an area of FCA focus in the year ahead.
Product governance will be a significant theme cropping up for the investment management sector in the year ahead.
The first area the FCA plans to deal with is the PRIIPs key information document. Concerns were raised in 2018 around the key information document, as summarised in an FCA Feedback Statement in February 2019. Under the Business Plan, the FCA states that it will continue work with firms and trade associations to resolve the issues identified. These issues relate to the scope of the PRIIPs Regulations, the Summary Risk Indicator, performance scenarios methodology and transaction costs.
Product governance compliance by asset managers will form a part of the FCA’s wider review of MiFID II implementation in 2019/20. The specific areas the FCA plans to assess are how asset managers:
- oversee the design of their products;
- identify their target market; and
- monitor their products and distribution activities.
Asset managers should prepare to be assessed on their compliance with both the spirit and the detail of the product governance requirements. The ability to demonstrate compliance with contemporaneous evidence will be critical.
Managing funds with illiquid assets
Open-ended funds, in particular non-UCITS retail schemes, that invest in illiquid assets, such as property, can encounter difficulties if many investors simultaneously try to withdraw their money at short notice. This happened following the result of the UK referendum on EU membership in June 2016, when a number of property funds had to suspend dealing temporarily. Although the regulatory tools worked as they were intended, the FCA probed this area more closely (see Discussion Paper) and reached the view that improvements were needed. Those improvements related to the use of suspensions and other liquidity management tools, contingency planning, oversight arrangements and disclosure to retail clients. The proposed changes were set out in its consultation paper CP18/27 and are relevant to those with an interest in these types of funds (fund managers, depositaries, ancillary service providers, intermediaries and investors). There will also be implications for those who communicate financial promotions of funds investing mainly in illiquid assets to retail clients.
According to the Business Plan, the final rules and guidance were intended to be published in the first half of 2019. The FCA believes that the new rules will ensure retail clients are better informed about the inherent risks of investing in these types of funds, and reduce harm during times of market stress.
Osborne Clarke comment: Brexit focus and ‘global regulation’
According to the Business Plan, the FCA’s Brexit-related costs are the same as last year (£5 million). The FCA describes the work required for an orderly transition as including the need to mitigate or respond to potential gaps in global regulation that create risks for UK markets and consumers. There is a strong focus now on the FCA retaining global influence, and the theme of ‘global regulation’ runs throughout the Business Plan. The risks of a changing global context will be addressed in the continued work on the EU withdrawal programme. The FCA also plans to “redouble our international engagement” to ensure the UK continues to “influence global standards of conduct regulation“.
‘Global regulation’ is evolving. For the asset management sector, this global theme will mean increasing scrutiny. The FCA has had to contend with a mixture of global regulatory convergence in some areas and considerable fragmentation in others. The FCA needs to navigate a complex distribution landscape and global regulation is entering new areas such as, for example, fintech and sustainable investing.