This Week in Regulation


[speech] The future of investment and asset management regulation

Megan Butler, Executive Director of Supervision – Investment, Wholesale and Specialists at the FCA recently delivered a speech around the future of investment and asset management regulation. In her speech, she outlined how the FCA perceives robust regulation as a critical component of future success within financial services.

Ms Butler highlighted the work of the asset management industry, outlining its impact on the economy and the FCA’s focus on ensuring consumers are being protected. It highlights the need to shift away from a more traditional approach by moving to an approach which focusses on consumer and market harm. In addition, Ms Butler defines how the FCA acknowledges specific issues within the market or across firms, as well as how their individual business units operate in terms of policy, competition, authorisation, supervision and enforcement. This supports the FCA’s decision to address areas which impact wider society.

Asset management plays a key part in business across the UK, Ms Butler highlights that over three quarters of UK households are accumulating or receiving pensions which rely on its services, as well as 11 million people investing in products such as stocks and shares ISA’s.

The FCA’s asset management market study highlighted various issues that exist in the market, with key findings showing strong evidence of weak price competition across the industry. The FCA consulted on these findings between November 2016 and February 2017, publishing its final report in June. It received many responses to its proposals which included:

  • Independent directors on fund governance boards;
  • Stronger requirements for fund governance boards to act in the best interests of fund investors whilst considering value for money;
  • An expectation that boards will intervene if they experience poor fund performance;
  • Obligations to return risk-free box profits to funds.

The FCA is currently in the process of reviewing the responses to the paper and has recently closed its consultation around remedies and potential changes to its handbook. It has also recently referred the investment consultancy sector to the Competition and Markets Authority (CMA), which published an outline of its investigation, focussing on addressing key questions such as:

  • Whether investment consultants are encouraged to compete for clients?
  • If the quality and value for money of services provided to customers is reduced by conflicts of interest?
  • Are there fewer challengers to put competitive pressure on established investment consultants as a result of barriers to entry? If so, does this cause harm to customers?

The CMA requires submissions in response to its statement by 12th October. The FCA is in the process of preparing a second consultation on transparency related points which include benchmarking and performance reporting and potentially, objectives and the all-in fee. The FCA’s main priority within this consultation is to implement measures which will reduce harm and increase public value.

Launch of the Asset Management Hub

The FCA acknowledges that there is currently a substantial amount of new regulation in the market, with rules in place to protect the market which can act as barriers to entry for new firms. Despite this, it has still continued to receive a high amount of applications for authorisation within the market, approving a total of 204 applications last year. It is aware that many businesses experience difficulties around understanding the regulator’s requirements, which is why it is setting up an asset management authorisation hub to provide support to new market entrants.

Assisting start-up firms as they become authorised and move on to regular supervision, the hub has four key objectives:

  • Clarify expectations and provide firms with better guidance on regulations and processes;
  • Provide easy access to information via a portal;
  • Nurture more positive and personalised engagement between the FCA and market entrants;
  • Provide thorough support for firms who move through the start-up cycle.

Sector priorities- SMCR & MiFID II

Ms Butler also acknowledges the approaching deadline of the SMCR and MiFID II, highlighting how the FCA sees personal accountability as a critical aspect for the future of financial services.

From credit unions to banks, a wide range of services exist under the regime, which covers a large spectrum of risks, effects and complications. To ensure all firms are treated on a case by case basis, the FCA plans to introduce a core regime where baseline requirements will apply to every firm, as well as an enhanced regime for larger and more complex firms. The FCA is keen to hear public opinions on these regimes, encouraging firms to respond to proposals in Consultation Paper 17/25 by November 3rd.

The FCA believes MiFID II will allow it to monitor the market more easily than before, as well as highlighting non-compliance at an earlier point. Ms Butler highlights two expectations of firms as a result of the new regulation; one is the expectation for firms to produce Suspicious Transaction and Order Reports, as well as legal obligations around trading under MiFID II which will require a legal entity identifier. The FCA does not expect all firms to meet the requirements of MiFID II in the first instance, but it expects firms so show they have taken sufficient action towards meeting the new requirements and that they have plans in place to complete these.

Market priorities

Ms Butler highlights the regulator’s expectations for firms around culture, in terms of demonstrating positive customer outcomes and ensuring market integrity. She outlines five conduct questions advice firms should be asking themselves to ensure they are meeting regulatory expectations:

  • Do you have proactive steps in place to explore conduct risks across the business?
  • How do you encourage all areas of the business to take responsibility for managing conduct?
  • What support do you have in place to enable individuals to improve their business conduct or activities?
  • How does the board and executive committee gain an oversight of conduct in your organisation?
  • Are there any business activities that hinder work to improve conduct?

In addition to encouraging firms to consider the above, Ms Butler is working with firms to improve processes so individuals can experience the benefits of a competitive market.


FCA’s work on Defined Benefit Pension Transfers

The FCA is currently reviewing its work around Defined Benefit (DB) transfers to assess the advice consumers receive from firms and to investigate if they are at risk of harm.

During the past year, many individuals have transferred from DB pension schemes to personal pensions. As a result, the FCA is investigating how advisory firms have tailored their business models and processes, as well as identifying the risk of harm for consumers leaving DB schemes.

From its research, the FCA found that a number of firms are not paying an adequate amount of attention to consumer outcomes when they change their business models in relation to the pension reforms.

Over the past two years the FCA has requested detailed information from 22 firms around their DB transfer business. From this information, it reviewed 13 firms’ client files and visited another 12. Resulting from this, four firms have stopped advising on DB transfers.

Key findings

Some firms make transfer recommendations without considering the receiving scheme or investments, or without knowledge of the introducing advisers aims of investment, which raises the risk of pensions being open to scam investments.

General risks around firms accepting introductions were highlighted in the FCA’s alert in August 2016. Many firms failed to consider these which presented the following issues:

  • A lack of information sharing between the introducing firm and the specialist firm. This resulted in the specialist firm not having adequate advice around the client’s objectives, requirements and personal circumstances which increased the potential for unsuitable advice;
  • The FCA found advisers or transfer specialists making recommendations despite the lack of knowledge to where the transfer proceeds would be invested. In some instances a recommendation around a receiving scheme or underlying investment was not made by a specialist transfer firm. This was on the condition that the adviser would make the recommendation once the transfer had concluded.
  • In some firms the transfer analysis was based on default schemes and/or funds rather than the actual receiving schemes. Despite raising these concerns earlier this year, the FCA was disappointed to find that some firms have failed to take the appropriate action to address this.
  • Although significant growth has been seen in DB transfer business, many firms have failed to ensure they had enough compliance resource to deal with the increase. As a result many firms have failed to process cases within the three month time scale from the offer of the transfer.

Suitability of advice

The FCA also expressed its concerns around the suitability of advice. It reviewed a total of 88 DB transfers with the recommendation to transfer. They found 47% of cases suitable with 17% unsuitable. In terms of the suitability of the recommended product it found 35% were suitable and 24% unsuitable.

Following the results, the FCA has advised firms to ensure that personal recommendations are suitable for their clients. It highlights that some firms have processes and procedures which make it very difficult to establish the suitability of advice. This includes firms that:

  • Failed to acquire information regarding clients’ needs or personal circumstances;
  • Did not address the needs of the client alongside their objectives when making the recommendation;
  • Didn’t make an adequate assessment of the risk the client is willing and able to take in consideration of their pension benefits;

Future focus

The FCA has recently consulted on changes to its rules and guidance around pension transfers and advice (CP 17/16), with the key aim of clarifying its expectations in light of the changes in the transfer market.

The FCA will continue its work in the market and will assess firms that provide advice on DB transfers. It expects firms to keep up-to-date with the FCA’s expectations around DB pension transfers.


[Speech] Challenges for the FCA: consumer credit, long-term savings and an aging population

Andrew Bailey recently delivered a speech outlining some of the key challenges the FCA experiences around consumer credit, long-term savings and retirement provision.

The FCA faces many policy issues as a regulator, as it works towards it overarching objective of making markets work well for consumers, supported by its three operational objectives.

He outlines the major economic development since the economic crisis is slower economic and productivity growth.  The introduction of monetary policy and a decrease in interest rates has supported the market despite this slow growth. In addition, substantial developments in the technology industry have had a great impact upon the delivery and access to finance, as well as helping with the access barriers that different generations experience.

Consumer Credit

In its latest assessment, the Bank of England’s Financial Policy Committee highlighted the rapid growth across all areas of consumer credit. Whilst this is doesn’t present a risk to overall economic growth, if an economic downturn was to occur, this would increase the risks to credit lenders as well as risks to consumers.

The FCA has designed a number of measures to support consumers with persistent credit card debt, so they have greater control over credit limit increases and so firms can intervene at an earlier stage to help consumers. The FCA uses a number of policy tools that either cap or limit the cost. In some instances it may use nudges and targeted transparency to change consumer behaviour. Andrew Bailey outlines the importance of understanding business models, investigating into the balance of returns from products and groups of consumers, as well as challenging the FCA’s own statutory objectives.

The FCA is aware that building an appropriate system to handle consumer credit cannot be achieved by the regulator alone, but it has encouraged discussions to identify what is possible and how stakeholders can work together.

Long-term saving and retirement

A recent major development across the savings and retirement sector is the shift from a combination of state and employer responsibility for long-term saving and pensions to increased individual responsibility and greater choice.

The FCA has made changes to assist individuals in becoming homeowners, helping firms offer a range of lifetime mortgages. In addition, it has published proposals to make it easier to loan to older consumers, where the borrower would commit to paying monthly interest with the sale of the property being repaid by the loan.

Over the last two years the FCA has been active in the long-term savings and pension’s area and has introduced a number of major Government pension policy reforms, allowing for greater flexibility. It is continuously providing support around innovation in terms of the supply of advice through its Regulatory Sandbox and Project Innovate. It has also undertaken a review of advice through the Financial Advice Markets Review (FAMR) to investigate ways in which the Government, industry and regulators can encourage a market which delivers affordable and accessible advice and guidance to consumers, at all stages of their lives.

Ageing and financial services

Consumers have been urged to take greater responsibility for their financial decisions in later life, including planning for retirement and potential periods of ill health. To assist consumers with these, two changes have been implemented across the market, including; the change from physical to digital online financial services and firms gaining access to big data to enable them to effectively manage consumer risk and pricing. There is no doubt these will present challenges, such as technology presenting barriers to access for elderly consumers and firms potentially exploiting consumers by misusing data.

The FCA’s study identified a range of issues facing older consumers, such as vulnerability, and looked at third party access, how firms can help older consumers manage their finances more easily. Barriers to product development and positive innovation to support consumers were also identified as potential issues within this market and whether access to regulated advice is clear to consumers.

The FCA is aware that there are some issues yet to be identified but it has taken steps to improve some of the key issues as outlined above.

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