Investment Management Regulatory Update - Q3 2012

Developments this quarter

Welcome to the fourth edition of our Investment Management Regulatory Update which summarises the regulatory developments affecting the UK investment management sector.

In this edition we cover key international, European and UK regulatory developments including:

Supervision of Asset Managers under the FCA – speeches from the FSA Wealth Management: FSA to commence further thematic work UCITS Directive update MiFID and MiFIR update Short Selling Regulation update Capital Requirements Directive and Capital Requirements Regulation HM Treasury consultation: Recovery and Resolution Plans for Financial Market Infrastructures FSA consultation and guidance papers Futures and Options Association publishes guidance for electronic trading environments EMIR – ESMA publishes technical standards for derivatives and CCPs Retail Distribution Review update Enforcement cases Supervision of asset managers under the FCA – speeches from the FSA

On 25 September, a number of senior regulators gave speeches at the Financial Services Authority's (FSA) Asset Management Conference in London.

Martin Wheatley (Managing Director, FSA and CEO designate of the Financial Conduct Authority (FCA)) introduced the conference and spoke on his vision for conduct regulation and how it will affect asset managers. Mr Wheatley set out that the FCA will seek to use its new powers to act sooner and more decisively. He highlighted three current issues within the asset management sector:

Charging - finding a way to make sure that customers' reasonable expectations are met and that firms' conduct allows for the fair treatment of customers. Competition - ensuring effective competition including on fees and charges in addition to aspirational future performance criteria. Understanding customers - understanding why consumers behave in the way they do and making it easier for consumers to make rational decisions, increasing transparency around fees and charges. Following on from Mr Wheatley, Clive Adamson's (Director of Supervision, Conduct Business Unit, FSA) speech entitled ' Supervision of Asset Managers under the Financial Conduct Authority' set out the FCA's approach to supervision of firms, including asset managers. Mr Adamson explained how the FCA's approach will differ from that of the FSA. This includes the division of firms into four new supervision categories – C1, C2, C3 or C4 – according to their impact on consumers and the market. C1 firms are those likely to be the largest, most complex firms with very large client assets or trading bases whereas C4 firms are likely to be those smaller firms with simpler business models and products. Firms are expected to be notified of their categorisations at the beginning of 2013.

Mr Adamson also outlined the three pillars underlining the FCA's approach to day-to-day supervision:

A new Firm Systematic Framework (FSF) - achieving a forward looking assessment of a firm's conduct risks by analysing firms' business models and strategies to ensure that the fair treatment of customers and market integrity are properly embedded in how the firm runs its business. Event driven work - dealing with issues that are emerging or have happened and were unforeseen in their nature. Covering everything from mergers and acquisitions whistleblowing allegations to spikes in reported complaints at a firm. Issues and products - dedicated sector teams working with front-line supervisors and other non-supervision staff to produce Sector Risk Assessments of conduct risks across all sectors. On the subject of prudential regulation, Mr Adamson noted that the FCA will retain responsibility for the prudential regulation of 23,000 firms. In a shift from the current philosophy of aiming to reduce the probability that a firm fails, the FCA's aim will be to reduce the impact on customers and the market in the eventuality that a firm does fail. There will therefore be more focus on the ability to achieve an orderly wind-down of a firm's business, including how resolution could be achieved.

Mr Adamson indicated that more details will be provided in the FCA's Approach Document which will be issued in October 2012.

Wealth management: FSA to commence further thematic work

In August 2012, the FSA stated that it had commenced a new phase of thematic reviews focusing on the suitability of client portfolios in the wealth management sector. This follows a review of the suitability of client portfolios of a sample of wealth management firms in 2011 from which the FSA identified the following as key areas of weaknesses:

The inability of firms to demonstrate suitability due to the lack of or out-of-date know-your-client (KYC) information; inadequate risk-profiling; failure to implement Markets in Financial Instruments Directive (MiFID) client classification requirements; inadequate record keeping of a client's financial situation; and the failure to obtain adequate information on clients' knowledge, experience and investment objectives. The risk of unsuitability due to inconsistencies between portfolios and the client's risk appetite; and inconsistences between portfolios and the client's investment objectives. The review led to enforcement referrals, skilled person's reports and significant remediation programmes within the firms that were sampled. The new thematic review will focus on the suitability of client outcomes and will also conduct a direct assessment of firms' systems and controls in relation to the suitability of client portfolios.

The FSA has stated that it will carry out interviews with key individuals from the firms that were sampled in the previous review. The purpose of these interviews will be to determine whether these firms have sufficiently addressed the FSA's concerns in relation to identifying the suitability of client portfolios and in identifying and compensating customers who may have suffered in the past as a result of these deficiencies. Additionally, the FSA has expressed concerns that these weaknesses may also be common in other firms within the wealth management industry that were not sampled.

The FSA considers suitability and the ability to demonstrate it a key area of risk within the wealth management sector and will continue to increase its supervisory focus in this area.

Undertakings for Collective Investment in Transferable Securities (UCITS) Directive update

European Commission proposals on Packaged Retail Investment Products (PRIPs) and a revision of UCITS

On 3 July, the European Commission published PRIPs and UCITS V proposals as part of a consumer protection package.

PRIPs seeks to harmonise disclosure rules for retail investment products across sectors, proposing the disclosure of the Key Information Document, a concise and highly standardised document, when investment products are sold to retail investors. The proposed Regulation will...