The Financial Conduct Authority (FCA) has revealed its thematic supervisory plans for 2014/15 as a central part of its annual Business Plan.
The supervisory plan contains much that will be of relevance to asset managers and provides an indication of how the regulator’s conduct focused agenda will impact both retail and wholesale investment management.
The plan builds upon FCA chief executive Martin Wheatley’s recent comments that “Over the next year we will increase the intensity with which we supervise wholesale conduct to ensure that transactions undertaken by these firms do not have a harmful impact on market integrity.”
The recent Budget announcements regarding pensions, generated a buzz of anticipation in the wealth management sector. The wider availability of retirement funds could provide a fillip to longer term investment products and management services in this space.
As part of a number of initiatives to address long-term savings and investments, the FCA announced a thematic review into the use of in-house funds in wealth management firms, providing an assessment as to how wealth managers and private banks effectively control the conflicts of interest that arise when client assets are invested in such (in-house) funds.
Areas Cordium considers the FCA might focus on are:
• How well the discretionary manager covers the whole market before selecting the in-house fund;
• Whether restrictions placed on the manager limiting it to in-house funds are clearly disclosed;
• Whether this restriction is reflected in the level of fees charged to the client;
• Whether the management and oversight of the in-house funds is as diligent and robust as it would be for external managers; and
• Whether the range of in-house funds supported is sufficient for the risk profiles of the target investor base.
The FCA states that it will continue to increase its thematic supervision across the investment management sector. The regulator highlights a new review of market abuse controls in asset managers, considering how firms ensure trading activity is consistent with the FCA’s expectations of market conduct. 


The regulator has placed significant emphasis on market abuse and has been successful in bringing a number of enforcement cases against firms and individuals over the past few years. The FCA continues to communicate its expectations through speeches and its Market Watch publication so firms should review and update their market abuse risk assessment, ensure controls and management information remain effective and confirm that market abuse training is up to date for all investment management staff. 


At its Asset Management Conference last October, the FCA highlighted investment managers’ role as “trusted agents” where: “asset managers do not let conflicts of interest interfere with (the) best possible decisions on behalf of … clients”; where “asset managers spend their clients’ money as though it was their own and manage costs with as much tenacity as they produce returns”; and, where “investors are given easily understood information on the risks and costs of the service”. The FCA’s business plan builds on this theme with more work proposed in Q3 2014 to ensure that asset managers are acting as good agents and taking proper account of investor interests. Expect a focus on mandate suitability, asset allocation, dealing and execution arrangements, fees and charges and the manager’s role in product design and governance.


Product design and governance will also be at the core of a proposed thematic review listed under “General insurance and protection” but running parallel with the Trusted Agent review entitled “Cover holders”, where the FCA proposes to look at distribution chains in firms that operate in wholesale markets, but also consider the impact on retail and small commercial customers. In particular, key risks in complex distribution chains will be considered together with the mixed responsibilities in them, including the cultural risks relating to product design, sales and post-sales handling. 


This could impact firms that design, operate or manage products that could reach the retail investor, perhaps through intermediaries, even where the firm does not have direct retail contact itself. Structured products, model portfolios and the distribution of complex UCITS and alternative funds are likely to be in the regulator’s view. 


In 2014 the FCA will also complete pieces of existing work commenced under its conduct agenda. Firms may have been impacted by these reviews already or at least re-assessed their relative importance as part of their 2014 compliance risk assessments and monitoring plans. The work involves:
• Publishing its findings on best execution, which included investment firms’ execution quality, monitoring and systems and controls in several markets to support consumer protection and market integrity – expect this to play an important role in the Trusted Agent review later this year;
• Publishing feedback and policy proposals in relation to changes to the use of dealing commission rules (CP13/17 and the broader public debate on the future of the use of dealing commission regime; and
• Continuing with thematic work on the risks arising from conflicted remuneration practices, complex business models and products in wholesale markets.
The FCA has also announced a number of cross-sector thematic reviews to address risks it perceives firms as having. These cover a number of areas which, in all likelihood, have relatively incidental impact on the asset management sector. Each, of course, would be of significance if a firm is actually selected to participate in the FCA’s review. In any event, the areas of review prove instructive as to the FCA’s thinking and can be summarised thus:
• Managing the performance of staff – how firms manage the performance of their sales staff and whether pressure put on staff (through, for example, sales targets) increases the risk of mis-selling;
• Visibility of IT resilience and risks at board level – assessment of how far individual firms have progressed against the feedback they were given after the Financial Services Authority’s 2012 ‘Dear Chairman’ exercise. Working jointly with the PRA and the Bank of England, the FCA aims to assess how well firms manage their own exposure to risks, to what extent IT risks are discussed at board level, and whether boards have the skills and expertise to challenge executive decisions;
• Enhancing whistleblowing activity – The FCA wants to promote a culture whereby people feel prepared to speak up about wrongdoing within a firm. The FCA will carry out work to implement and supervise whistleblowing changes in firms. Whistleblowing and a firm’s commitment to establishing the right culture is often considered marginal to other areas of compliance but the FCA signals that greater attention should be given to this area.
