EMBARGOED UNTIL 2.30 28TH SEPTEMBER 2017
Megan
Butler, Executive Director of Supervision - Investment, Wholesale and Specialist
Where next for investment and asset management regulation?
Clarifying our
supervisory approach
It’s a pleasure to join everyone.
Towards the end of his presidency, Ronald Reagan quipped
that Government’s view of the economy could be summed up as: ‘If it moves, tax
it. If it keeps moving, regulate it. And if it stops moving, subsidise it’.
As you might imagine, we don’t tend to see our role that
way. Rather, we see robust regulation as fundamental to the future success of financial
services.
But we are conscious that you have experienced – and
continue to experience – regulatory change.
So my plan this afternoon is to clarify our supervisory
priorities. What is it – day in, day out - that we really care about? I also
want to provide detail on our plans for an FCA asset management authorisation
hub.
But first, I want to reflect on a very busy 12-month period.
And I should begin by acknowledging the role of the
investment community in supporting the FCA Mission – which we published earlier
this year, along with our business plan and sector views.
The Mission is essentially the FCA’s organising philosophy –
it provides a framework to underpin our decision-making, including decisions on
prioritisation.
We see it as an extremely important step. Traditionally,
regulators have tended to concentrate on ‘risks’ to their objectives. An inward
focus. The Mission sets out a fundamental switch by concentrating on ‘harm’ to
customers and markets. An external focus.
It also establishes how we respond to specific issues within
markets or firms, as well as decisions on how we operate our individual
business units, including: policy, competition, authorisation, supervision and
enforcement.
If you’ve read the document, you’ll see we haven’t shied
away from putting public interest at the centre of our regulation.
We don’t think this is a controversial focus. But it does
mean we take a particular interest in corners of the industry that most affect
wider society – which puts asset management squarely into the bracket of ‘sectors
that we care deeply about’.
From your perspective, I can appreciate that this might seem
a bit of a double edged sword. However, I want to stress that we see your role
in society as an overwhelmingly positive one.
We say it many times, but asset management is central to
life and business in the UK.
You curate a 12 percent share of global AUM. Your industry
has created around 92,000 UK jobs.
Over three quarters of households are saving towards, or
else receiving pensions that rely on your services - whether directly or
indirectly. And 11 million people are invested in products like stocks and
shares ISAs.
In other words, without asset managers, without your ability
to grow the wealth of ordinary citizens, issues like pension provision would be
many orders of magnitude more pressing.
So investment management is not just a positive economic
influence. It is also of great, and growing, importance to the public.
Instilling greater
competition and strong governance
That said, our interim Asset Management Market Study outlined
a number of issues in the market. Not all of it made easy reading.
I don’t want to go over the full report and findings today.
I know you are apprised of the detail.
But the topline is that we found powerful evidence of weak
price competition in the industry - with no clear link between price and
performance.
As you know, we consulted on the interim findings between
November and February this year – and published our final report in June.
We’ve since received a lot of responses to our consultation
paper, which included important proposals in areas including:
·
Independent directors on fund governance boards
·
A strengthened requirement for fund governance
boards to act in the best interests of fund investors, and to explicitly
consider value for money.
·
An expectation that boards will take action if
they encounter poor fund performance
·
And a requirement to return risk-free box
profits to funds.
In terms of next steps – we are reviewing responses to the
paper now. And our consultation on remedies and possible changes to the FCA
handbook ends today.
We also recently referred the investment consultancy sector
to the Competition and Markets Authority. And last week, the CMA set out a
structure for its investigation – posing three broad questions:
·
First, do investment consultants have enough
incentive to compete for clients?
·
Second, do conflicts of interest reduce the
quality and value for money of services provided to customers?
·
And third, do barriers to entry and expansion
mean there are fewer challengers to put competitive pressure on established
investment consultants – causing harm to customers?
The CMA has asked for submissions in response to its issues
statement by 12 October.
In the meantime, we will prepare a second consultation on
transparency-related points like benchmarking, performance reporting and, if
needed, objectives and the all-in fee.
We believe this adds up to a strong package of measures that
will reduce harm and increase public value.
We firmly believe it will help you attract fund flows. People
will invest in you because you take, and are seen to take, decisions in the
best interests of your clients.
Launching the asset management hub
Nonetheless, we know it is
not enough to ask investment managers – on your own – to make improvements in
the name of competition. We need to play our own part.
A traditional critique of regulation
is that a lot of red tape tends to protect incumbents from competition by putting
off new entrants to the market.
And on this point, we know
prospective entrants to the asset management industry would welcome more
support from the FCA.
We receive a lot of
applications each year for authorisation from asset managers. We approved 204
new firms in 2016.
We know some of those
businesses find it difficult to navigate regulation. In fact, our contact
centre takes up to 1,200 pre, and post application calls a month from
investment managers seeking clarification on issues ranging from authorisation,
to regulation and reporting.
I should say that this is
not necessarily a big surprise because it is extremely difficult to describe
complexity simply.
But we do see it is an
imperative that the best investment managers aren’t put off of operating in the
UK by avoidable barriers to entry.
So I’m pleased to announce
today that the FCA is setting up an asset management authorisation hub to
support new entrants to the market.
The Hub will assist
start-ups as they move between pre-authorisation and authorisation, and on to
regular supervision.
To achieve this, we want
to build a user friendly system of support based on four principal objectives:
·
We want to clarify expectations - and support
firms with better guidance on regulations and processes
·
We want to make information easier to access via
a dedicated portal for investment managers on our website.
·
We want to foster more positive, personalised
engagement between the FCA and market entrants.
·
And we want to provide end-to-end support for
firms moving through the start-up cycle.
We are launching phase one
of the Hub next month - at which point we will offer new firms pre-application
meetings, dedicated case officers and access to the website portal.
On top of this, we will make
it easier for firms to engage – directly – with our supervisors after they
become authorised.
Next year, our intention
is to expand the offer to include support, like quarterly surgeries and online
booking for pre-application meetings.
We’ll also publish more detail
on entry criteria and application details – so there is a lot of support in the
pipeline for new entrants.
I do want to make it clear
though that the authorisation hub is not
designed to lower entry standards to the market.
We have no intention of
presiding over a decline in quality. So entrants will need to meet the same rigorous
standards as current firms before they receive authorisation.
It is though a good
indicator of your sector’s social and economic importance.
As I have already
discussed, public value is integral to our objectives. Hence we want your clients
to benefit from the best new ideas and businesses in investment management.
Our aim is to achieve that
goal, at least in part, by providing greater clarity, and by helping asset
managers to navigate our processes.
As you may know, we
already successfully operate a new bank start-up unit with the PRA. Over time,
we’ll take a view on whether it would be beneficial to continue to expand this
kind of support even more widely.
A busy period – SMCR & MiFID II
But moving on to more pressing
priorities for asset managers, I need to say a few words on the extension of
the Senior Managers Regime and MiFID II, as well as on Brexit.
The SMCR and MiFID countdowns
are well and truly on, so let me briefly mention some areas that are uppermost
in our own minds.
First, the extension of
the Senior Managers and Certification Regime.
I’ve repeated this many
times, but we see personal accountability as fundamental to the future of
financial services.
This is why good
governance is a central theme of the asset management market study.
It is also why we want to
roll out the SMCR to pretty much every firm that offers financial services, and
is regulated by the FCA.
As you know, the regime
came into force for banks and PRA-designated investment firms last year – and
our intention is to use this experience wisely.
In particular, we are
sensitive to the fact that the roll out will affect firms of many different shapes
and sizes.
At the moment, we already
have a wide range of businesses under the SMCR: with credit unions on one end
of the spectrum, banks on the other. Allwith different risks, impact and
complexity.
We have learnt from this.
We want the new regime to be proportionate. We also want it to reflect the fact
that each of you is different.
And I think this is
evident in our proposals, which are inherently proportionate.
So we have put forward plans
for a ‘core regime’ (which will apply baseline requirements to every firm) and
an ‘enhanced regime’ (which will affect the largest and most complex businesses,
including a few firms here today).
We believe this is an essential
step toward making sure the regime is both proportionate and effective. But we
need you to make your voice heard.
Over the summer, we put
out our proposals for feedback in Consultation Paper 17/25. And I encourage you
to respond by our November 3 deadline.
MiFID II
Exactly two months after
that of course, MiFID II comes into operation.
From our perspective, we support
the key objectives of the new legislation – particularly around its aims to
improve market cleanliness and efficiency, as well as to enhance transparency
to retail clients on costs.
I think it is important to
point out that the range, and depth of data we’ll get from January will improve
our ability to monitor the market. Helping us spot abusive practices earlier.
From our perspective, this
is a significant step forward, in as much as it will help us see the totality
of the market – both buy and sell side.
I am sure that we can all
agree that ultimately everyone benefits from this in the form of cleaner, more efficient
markets.
But I am conscious that MiFID’s
new reporting requirements do place an onus on firms.
I’ll come on to how we are
helping you deal with this in a second. But from our perspective, there are two
pressing priorities for industry.
First, we do expect firms
to submit Suspicious Transaction and Order Reports to us - in line with their obligations
under the Market Abuse Regime.
On top of which, we expect
you to make sure your systems and controls are deterring market abuse.
Second, I need to stress
that legal entities that want to trade under MiFID II will need a legal entity
identifier.
So please make sure your
underlying clients are aware of the deadline and are making plans to get an
LEI. The process is not particularly expensive or complex.
In the meantime, I want to
make it clear that we will take a sensible and proportionate approach to
MiFID’s introduction.
My colleague Mark Steward
– our director of enforcement – said last week that we have no intention of
taking enforcement action against firms for not meeting all MiFID II requirements
straight away – if there is evidence they have taken sufficient steps to meet
the new obligations by the start date,and that there are plans in place to
complete the process.
We will also provide
support to asset managers – where we can – to resolve significant business
planning issues.
We know, for example, that
research continues to pose a challenge.
There are still some ‘will
they, won’t they’ stories in the press about who is going to pass on costs to
clients.
And I know there is a
question mark hanging over firms that are registered as broker dealers in the
US and other territories – and who can’t accept payment for research, without
also applying to become an investment advisor.
Let me assure you that we
are fully aware of this issue, and we are in close contact with colleagues in
the EU and US, who are working on a solution. So please watch this space.
Regulatory
co-operation is essential
Now, staying on the topic of international co-operation, it
is clearly impossible to talk about change in your industry and not mention
Brexit.
Andrew Bailey, our Chief Executive, has already spoken on
the importance of open markets and regulatory co-operation.
I want to re-emphasise that we think it is crucial for the
UK investment industry and the rest of Europe – to uphold these principles.
And we are particularly conscious of the need to find sensible
outcomes on delegation.
We see no real justification for unnecessarily
complicating rules around delegation and outsourcing. Both are integral elements
of efficient market business models. Both work well now. And there is no reason
to suggest both won’t work well in the future.
On top of this, there is an important question as to
whether a change to delegation provision could, potentially, have an adverse
impact on European and global markets.
We think regulators are well placed to solve these
challenges. We will work extremely hard for pragmatic, productive and positive
cooperation between UK and European regulators – not forgetting the global
context.
We also want to work closely with you to support
Brexit-related business planning, so you can help maintain the integrity of UK
markets and protect customers.
As Andrew put it earlier this year, there is no good reason
why one should sacrifice open financial markets – in the fund industry or any
other market – as an ‘inevitable response to Brexit’.
Our chief responsibility is to ensure financial markets work
well. We want an open market.
We want regulators to engage constructively, and to do this
by keeping the efficiency of global markets uppermost in their minds.
Our priorities for
you
I appreciate though that there is a great deal of
uncertainty and change for you to contend with at the moment. And I promised at
the start that I would clarify our supervisory priorities.
We do a lot of work
internally and externally to ensure that you understand our expectations,
objectives and priorities. I’ve already briefly mentioned the Mission and our
sector views.
And then there are our
regular firm communications, which are an important aspect of our engagement
with industry.
But we understand that
every business has its own identity. And we prefer firms to identify and
rectify problems themselves.
So we do not expect, nor do we want your firm to have the
same culture as the person’s next to you. But we do expect firms to put an onus
on positive customer outcomes and basic integrity.
How you accomplish this is up to you. But to give a sense of
what good looks like from our perspective – so what my supervisors care about,
day-in, day-out – we will be encouraging you to ask yourself five, very basic
conduct questions.
First: What proactive steps do you take to identify conduct
risks in your business? As with any risk, you cannot hope to mitigate something
you don’t know exists.
Second: How do you encourage people in front, middle, back
office, control and support functions to feel responsible for managing conduct?
Even with growing numbers of people in compliance, there are
more people on the frontline. They tend to understand the business. They tend
to know where the risks are. And they should – if we get the incentives right –
have the greatest interest in long term, sustainable good business practices.
Third: What support do you put in place to help your people improve
the conduct of their business or function?
Do your training and induction programmes, for example, lay
out your expectations of colleagues?
Do you provide information and reporting, or enable
committees to form and discuss issues? Do you pause to look at the main
initiatives being undertaken in your firm?
Cyber and information security, for example, has a huge
conduct element – including basics like clear desk policies and phishing scams.
We also see conduct risk in emerging areas like algorithms – looking not just
at the logic, but how they are actually used.
Fourth: How do your board and executive committee get
oversight of conduct in your organisation? And how do you bring it into your
discussions?
You want to know that the feedback loop is alive and
working. AML, for example, is not just about process; it is about behaviour. Is
the board able to stay abreast of these risks, and up to date with advances in
mitigation activity?
And fifth: Have you looked at whether there are any business
activities you’re engaged in that undermine your work to improve conduct?
This is a question that might start with incentives. For
example, does a member of staff with a good P&L get promoted or rewarded if
they bend the rules? Are positive role models identified and championed?
More widely, in business planning for example, if you raise
targets and cut budgets do you take note of the potential impact on conduct
risk?
Taken together, we think these questions offer you a useful
way for firms to think about managing conduct risks in your organisation.
And I can’t think of anywhere where that aspiration is more
important than in investment management.
You are, as I said at the start, an essential part of any solution
to the big global challenges like demographic change and saving shortfalls.
As a result, it is vital that we continue to work extremely
closely with you and the rest of the investment management community.
And we will continue to improve our own processes so people
see the benefits of a dynamic, competitive market.
Thank you.
ENDS
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