UK Regulatory

FCA speech on reforms for asset management sector

Christopher Woolard, FCA Executive Director of Strategy and Competition, delivered a speech [24.10.2017] at the Securities Industry and Financial Markets Association's 2017 Annual Meeting in Washington DC on reforms to the UK asset management sector. In Woolard's words, asset management is "taking on an ever greater importance" due to the size of the sector, the record low UK interest rate of 0.25% and the fact that the sector is one where "compound effects over the long-term really matter", including with regard to fees. Woolard summarised the FCA's proposed reforms as follows:

1. "Enhancing protections for investors", which includes:

  • "strengthened duty on fund managers to act in the best interest of their clients"
  • "increasing accountability through the Senior Managers and Certification Regime"(also see our earlier update here)
  • that "the boards of [mutual fund management companies] have a minimum of two, or at least 25%, independent directors, increasing the scrutiny at a senior level"

2. "Clarity on what [investors] are buying", which includes:

  • "a requirement on firms to set out clear, consumer friendly objectives"
  • "providing consumers with information on how they should evaluate the performance of the fund, for instance using a target against a benchmark or absolute return"

3. "Improve investor understanding over what they're paying", which includes:

  • "drawing on insight from our in house behavioural unit" with regard to "seemingly benign factors, such as where information appears on the page"
  • "more innovation in the market", including through Project Innovate and the regulatory Sandbox (see next update)
  • encouraging "more traditional new entrants to the market" and "[making] it more efficient to launch new funds" through the Asset Management Hub (see also our earlier update here)

Some of these proposals "will start to take effect from 2018 with others requiring further consultation early next year". Woolard also stated that: "high regulatory standards are an essential part of the UK system. A so-called bonfire of regulations would not serve anyone's long-term interests".

FCA report on lessons learned on the first year of the Regulatory Sandbox

The FCA has published a report on the first year of the Regulatory Sandbox, setting out its impact on the market and lessons learnt [20.10.2017]. The sandbox opened for applications in June 2016 with the aim of promoting effective competition in the interests of consumers by allowing firms to test innovative products, services and business models in a live market environment, with appropriate safeguards in place. The report found that the sandbox has been successful in meeting this objective. However, challenges faced by firms testing in the sandbox included access to banking services and smaller firms struggling to attract customers. Read more here.

Selected MiFID II standards will apply to Occupational Pension Scheme firms from 2 April 2018

In Handbook Notice No. 48 [20.10.2017] the FCA Board announced changes to the FCA handbook to implement the application of MiFID II to Occupational Pension Scheme (OPS) firms, following consultation in CP17/85. The changes are in the Glossary, SYSC10A and COBS 2 and 18. The new rules will come into force on 2 April 2018. According to the FCA, the changes 'extend selected MiFID II standards to [OPS] firms, specifically relating to best execution, research and inducements, and telephone taping'. The aim of the changes is to 'ensure that OPS firms that manage pension scheme assets on behalf of pension fund or other trustees meet similar investor protection standards to other forms of investment management in the UK'. For OPS firms, there is an exemption to the taping requirement for 'transactions in instruments not relevantly linked to trading on a trading venue'. In relation to best execution requirements, the first public execution quality report by OPS firms is due from 30 April 2019. The rules on client order handling (COBS 11.3), personal account dealing (COBS 11.7), reporting information to clients (COBS 16.2, 16.3) as modified by COBS 18.8.2R, and suitability (COBS 9) continue to apply to OPS firms.

FCA publishes final rules and further consultation paper on changes to the funding of the FSCS

The FCA has published a second consultation paper [30.10.2017] on changes to the Financial Services Compensation Scheme (FSCS) which aim to ensure the FSCS continues to provide the right protections, works effectively and is funded fairly. The consultation concerns proposals to:

  • merge the Life and Pensions and Investment Intermediation funding classes;
  • require product providers to contribute 25% of compensation costs in the intermediation class;
  • move pure protection intermediation from the Life and Pensions intermediation funding class to the General Insurance Distribution funding class;
  • increase the compensation limit for investment provision, investment intermediation, home finance intermediation, and debt management claims to £85,000; and
  • change the limit for intermediation of long-term care insurance claims, in line with the limit for other kinds of pure protection claim, to 100% of the claim instead of £50,000.

The paper also includes final rules relating to introducing and extending consumer protection, requiring Lloyd's to contribute to the retail pool, additional reporting requirements and amending payment arrangements, which will mostly come into effect on 1 April 2018. The consultation is open for comment until 30 January 2018.

EU Regulatory 

European Commission requests ESAs to report on the cost and past performance of the main categories of retail investment, insurance and pension products

The European Commission has issued a formal request to the European Supervisory Authorities (ESMA, EIOPA and the EBA) [19.10.2017] to issue recurrent reports on the cost and past performance of the main categories of retail investment, insurance and pension products. The reporting should be based on data and information already required to be reported or disclosed under European law and is intended to contribute towards the CMU Action Plan objective of fostering the participation of retail investors in capital markets. The European Commission provided a tentative timetable, suggesting that the first reporting will be in Q3/Q4 2018.

ESMA publishes first analysis on the impact of charges on mutual fund returns

The study, part of the ESMA Report on Trends, Risks and Vulnerabilities vol 2 2017, published on [12.09.2017], developed 'initial metrics to analyse the impact of ongoing fees, one-off charges and inflation on the returns of mutual funds'. Key preliminary results are that there is 'a substantial reduction in net returns available to investors, especially retail investors' and investment decisions by retail investors are 'only weakly cost- or price-sensitive'. ESMA has found that real returns adjusted for ongoing fees, one-off charges and inflation for the period 2013-2015 were on average 29% lower than nominal gross returns. For active funds, the average reduction is 30%, whereas for passive funds, it is 12%.

European Commission clarifies MiFID II effect on obtaining brokerage and research services from non-EU brokers

The European Commission has issued Q&A guidance on MiFID II: Interaction with Third Country Broker-dealers [26.10.2017] on questions regarding combining payments for research and for execution services into a single commission and on identifying a separate charge for research. According to the European Commission, the U.S. Securities and Exchange Commission has simultaneously agreed to 'relief for US brokers supplying research to EU firms' (see press release). This initiative 'will contribute to ensure that research budgets are decoupled from brokerage, in compliance with the requirements laid out in MiFID II'. Andrew Bailey, CEO of the FCA, has welcomed this outcome (see FCA statement) as 'a flexible solution that respects the integrity of both regulatory regimes'. The FCA has also highlighted that 'arrangements in which a UK asset manager pays the EU entity of a broker for global research content, or research is circulated within a buy-side group, can also be an acceptable way of achieving this, provided that they do not influence the firm's order routing decisions, execution costs and ability to act in its clients' best interests'. The FCA 'will continue to engage with firms on their implementation of MiFID II ahead of the 3 January 2018, and will monitor evolving market practices once the new rules are in effect to ensure compliance and evaluate the impact of the changes'.

Recent Pinsent Masons publications

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances,