Look out Alternative Asset Managers… the FCA is watching you!
The FCA has written a Dear CEO letter outlining key risks of harm that alternative investment firms pose to their customers or the markets in which they operate. In doing so, it has set out its regulatory expectations against six supervisory priorities.
Alternative investment firms should consider whether they present the risks the FCA has identified and, if so, should develop strategies for mitigating them. Firms should also be aware that they may be the subject of an FCA review and/or be asked to take part in one or more pieces of work related to the priorities in the future.
The six supervisory priorities, together with the actions the FCA intends to take to ensure firms comply, are summarised below.
- Investor exposure to inappropriate products or levels of investment risk: The FCA will review retail investor exposure to alternative investment products offered by alternatives firms. In particular, it will be testing that firms are aware of who their customers are and that they are placing a clear focus on acting in the best interests of their clients and funds.
- Client money and custody asset controls: The FCA will test whether firms that have permission to hold client money and safeguard custody assets are exercising those permissions under robust control frameworks.
- Market abuse: The FCA recently assessed the adequacy of market abuse controls in the sector. It visited a number of firms and provided individual feedback. It also sent a questionnaire to a large sample of firms across the buy side. The FCA has warned that it may conduct similar exercises in the future with other firms.
- Market integrity and disruption: The FCA may choose to undertake in-depth assessments of firms’ controls and has warned firms that this may include them.
- Financial crime: The FCA intends to review firms’ systems and controls to mitigate this risk. It will pay particular attention to the risks of money laundering and terrorist financing.
- Brexit: The FCA expects firms to consider how the end of the implementation period will affect them and their customers, and what action they may need to take to be ready for 1 January 2021.
The FCA recognises that many of these issues also apply to the asset management sector, and has therefore published a corresponding Dear CEO letter for Asset Managers.
FCA cracking down on financial advisors
On 21 January 2020 the FCA published a Dear CEO letter to financial advisory firms in the wake of scandals such as pensions mis-selling and the rise of financial scams. The FCA will be closely watching financial advisory firms over the next two years, following "an increasing number of cases where the actions of firms are resulting in significant harm to consumers' financial well-being". There will be an increasing focus on these firms to ensure advice received by consumers is suitable for their needs; appropriate redress is given to consumers where necessary; and fees are not excessive. The FCA will also be keeping a close eye out for pension and investment scams.
The FCA expects firms to consider and discuss the Dear CEO letter at a board level and agree what further action they should take. The FCA also expects principal firms to share the letter with their appointed representatives.
Brexit: FCA plans re-open notification window for Temporary Marketing Permissions Regime
On 30 January 2020, the FCA published a press release with information for firms during the implementation period. It confirms that during this period:
- Firms and funds will continue to benefit from passporting between the UK and EEA.
- There will be no changes to the reporting obligations for firms, including those for MiFIR transaction reporting, under EMIR, and for CRAs, which will continue in line with existing EU regulatory requirements.
Later this year, the FCA will confirm its plans to reopen the windows for EEA firms to notify them that they want to use the Temporary Permissions Regime, or for fund managers to give notice of any funds they want to continue to market in the UK under the Temporary Marketing Permissions Regime. This will allow additional notifications to be made by firms and fund managers before the end of the implementation period.
A new framework for Cayman’s regulatory regime for investment funds
On 8 January 2020, the Cayman Islands government published a draft Private Funds Bill, 2020 and a draft amendment to the Mutual Funds Law (2019 Revision). The new framework is intended to align the Cayman Islands regulatory regime with international standards and expectations. The Bill and the Amendment are expected to be put before the Cayman Islands Legislative Assembly on 30 January 2020, where final changes may be made before they are passed into law. It is expected that there will then be a transition period for existing structures. Notably, closed ended funds, such as private equity-style limited partnerships, will not be required to be registered with the Cayman regulator.
AIC Report: Tackling the dangers of holding illiquid assets in open-ended funds
This report by the Association of Investment Companies (AIC) issued on 27 January 2020 examines the dangers of holding illiquid assets in open-ended funds. It explains the AIC’s solution to this problem – 'reliable redemption' – and calls for urgent action from regulators and policymakers to tackle systemic risk in the financial system.
The AIC believes that all open-ended funds should be required to offer 'reliable redemption' to match the redemption terms of the fund to the liquidity of the underlying assets. 'Reliable redemption' means:
- The basis on which an investor can leave the fund (in timescale, volume or price) should not change, irrespective of the level of redemptions.
- Redemption processes must not rely on assets being sold cheaply to raise cash to meet redemption requests.
- Redemption arrangements must operate in both normal and foreseeable stressed market conditions.