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    Andrew Bailey of FCA Offers Regulatory Take on Asset Management Sector

    April 26, 2018

    Andrew Bailey of FCA offered a regulatory perspective on the asset management sector, while speaking at the London Business School Annual Asset Management Conference. He examined the key challenges facing FCA and the asset management market, along with the regulatory developments in the sector. With regard to the regulatory developments, he focused on the market study on asset management that FCA conducted, the recent European legislation, and the technological developments.

    The market study revealed several drivers of weak competition in the asset management sector. Some investors are not well-placed to find better value for themselves, while struggling to protect their own interests and to drive competitive pressure on asset managers. To help mitigate this, FCA has issued the rules and consultations that seek to address demand- and supply-side problems in the asset management market, some of which are as follows:

    • Final rules on governance remedies focused on asset managers as agents of their underlying investors. 
    • Final rules requiring asset managers to pay profits they may earn when dealing as principal in the units of dual-prices fund without putting their own capital at risk back into the fund.
    • Revised guidance published on changes to make it easier for asset managers to move investors from more expensive share classes to cheaper but otherwise identical classes
    • Consultation proposing to improve clarity over what a fund is offering (what it aims to do, how it intends to do it, and how performance is shown) as lack of clarity is a reason for weak competition.

    The market study also highlighted the importance of clear disclosure of what asset management services cost through the presentation of a “single charge.” Behavioral testing by FCA showed that the way the new information is presented will be as important as the disclosure, if it is to help consumers make more informed choices. In response to other concerns highlighted by the market study, FCA is supporting an independent Institutional Disclosure Working Group (DWG). The group is seeking to agree a disclosure framework to support consistent disclosure of costs and charges to institutional investors. In this context, he also discussed the major change introduced by the EU regulations on the second Markets in Financial Institutions Directive (MiFID II) and Packaged Retail and Insurance based Investment Products (PRIIPS) Regulation. MiFID II and PRIIPS have recently introduced greater disclosure of all costs and charges, including transaction costs. Other issues highlighted by the market study include conflicts of interest, ineffective competition, and a lack of transparency on fiduciary management performance and fees in the investment consulting market.

    Mr. Bailey added that advances in technology are leading to various changes in the investment management sector, with significant developments in straight-through deal processing (STP) and distributed ledger technology (DLT). The advent of DLT opens the potential for STP to become even more efficient. Potential benefits include more efficient management of counterparty risk, enhanced reconciliation, and lower collateral requirements. Regulators will be looking at the ability of firms to oversee DLT, STP, and other technology-related outsourcing arrangements effectively. There are also questions around accountability, if interruption to these services results in any losses for investors. Another area of growth is the increasing use of artificial intelligence (AI). Areas using AI include risk management, compliance, investment decisions, securities trading and monitoring, and client relationship management. Investment managers may well have to increase their technology spends to keep up with AI developments. Supervision of AI remains a challenge and may also raise issues of accountability, said Mr. Bailey. He concluded that all of these are "very important issues for FCA."

     

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    Keywords: Europe, UK, Securities, Asset Management, Regulatory Developments, Fintech, Regtech, FCA

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