Today New City Initiative is comprised of 43 leading independent asset management firms from the UK and the Continent, managing approximately £500 billion and employing several thousand people.
Published by Charles Gubert
On January 20, 2020, the UK’s Financial Conduct Authority (FCA) sent a brief but blunt letter to the CEOs of asset management companies. The regulator did not mince its words. In the letter’s opening paragraphs, the FCA criticised corporate governance standards at asset managers as being unsatisfactory. The regulator then told asset managers that they did not deliver value to retail customers and had failed to invest adequately in their operational resilience and technology, which it said “could cause harm to market integrity or loss of sensitive data.” This warning shot from the FCA should not be taken lightly by the industry.
What is the FCA looking at?
Although references to Neil Woodford and M&G are conspicuously – albeit diplomatically – absent from the FCA’s letter, the regulator outlined that fund liquidity would be an area of intense focus in 2020. In fact, the FCA has already confirmed plans to introduce rule changes from September 2020 for non-UCITS retail schemes (NURS) under which they must provide investors with clear information about liquidity risks and the circumstances in which client access to funds might be restricted. The proposals also insist that entities investing in inherently illiquid assets (e.g. real estate) have plans in place to manage their liquidity risk.
Barely one month after the imposition of the Senior Managers & Certification Regime (SMCR) on asset managers, the FCA warned the industry that they should be taking the new rules very seriously. SMCR, which was introduced in response to a number of the banking scandals that emerged post-crisis, is designed to overhaul governance and accountability processes at fund managers. A failure to comply with SMCR could lead to harsh penalties.
The FCA concluded by saying it would be scrutinising fund governance and firms’ compliance with SMCR later this year. The regulator also said it would be assessing how much progress had been made on the value assessments, which asset managers must now carry out following the AMMS review. Similarly, the FCA will also be evaluating whether authorised fund managers (AFMs) have suitably independent boards (i.e. checking that one quarter of governing bodies are independent or there are a minimum of two independents).
In addition, the role of the ACD (authorised corporate director) in product suitability assessments was also touched upon in the FCA’s letter. MiFID II demands managers check that the investment products they are selling are appropriate for the retail investors who are buying them. While managers are ultimately responsible for this, the task of validating suitability can be delegated to an ACD. The FCA has said it wants full assurances that ACDs, who are on the payroll of managers, are not conflicted when they perform suitability tests.
In 2022, LIBOR – the benchmark used to price $350 trillion plus of financial instruments and a widely utilised measure of fund performance – will be replaced by new rates. Despite a lot of prevarication, the industry was left in no doubt that the FCA is very reluctant to push back any deadlines. The transition – if left to the last minute – could become very messy indeed. As a result, the FCA is keen for managers to execute their LIBOR change plans now.
The FCA highlighted it was critical that asset managers have robust operational infrastructure in place to protect client assets and their own businesses. The FCA instructed managers to ensure that they have effective safeguards overseeing technology and cyber-risk. The FCA added that it would be conducting ad hoc reviews at managers to check that they have credible resiliency measures. Moreover, the FCA reminded the industry that it was their obligation to promptly notify the regulator in the event of any technology failure.