Simon Collins: FCA focus on governance extends beyond industry study

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The introduction of the senior managers and certification regime for banks, building societies and insurers in March last year (to be rolled out to all regulated firms in 2018) has had an increased regulatory impact on firms and individuals.

This comes as a potentially critical regulatory issue manifests itself in the form of the FCA’s asset management market strategy, which was published at the end of last year.

The FCA study may also trigger a referral to the Competition & Markets Authority due to the weak price competition in the industry. The key issues are how do asset managers compete to deliver value, are asset managers prepared to control costs and quality along the value chain, and are there barriers to innovation and technological advances.

While the FCA findings are at this stage driving a consultation process for the industry, senior managers will be looking carefully at the proposed remedies being mentioned and suggested.

The underlying message is that firms need to be able to demonstrate how their funds deliver value for money, particularly for retail investors. Given the somewhat disturbing statistic that over 50 per cent of investors are either unsure or don’t realise they are paying charges on their investment products, firms will be wanting to challenge the level of transparency and clarity of fees, objectives and investment outcomes.

Why the senior managers regime is so pertinent is that the FCA is concerned about the effectiveness of governance within the asset management industry. What that will mean in practice is that there will be a strengthened duty on asset managers to act in the best interests of investors.

This increased duty is likely to manifest itself through changes to the composition of existing governance bodies to create more independence, the creation of an additional governance body and potentially introducing a structure akin to the US mutual fund structure. What we are also likely to see is increased expectations and duties for trustees and depositories and a focus on the statutory and fiduciary duty between asset managers and their investors.

The purpose of these governance reforms is to ensure unit holders or investors are treated fairly and one group of investors are not favoured over others. This will be achieved through enhanced communication, increased transparency around fees and charges, that is, showing in pounds and pence, clearer pricing models and greater focus on removing conflicts.

All these issues will be focusing the minds of firms’ senior management as they prepare to start their planning for the new senior managers and certification regime. This includes constructing their “responsibility map”, a document that will allow the regulator to clearly see the firm’s committee and governance structure and reporting lines, areas of individual focus and their statement of responsibility and which critical third-party providers the firm is engaged with among other matters.

The regime impacts virtually all staff with the introduction of conduct rules for all levels of the firm and far greater attention on the fit and properness of senior and customer facing staff.

As if that is not enough to be thinking of, in addition to Mifid II and the forthcoming General Data Protection regulations all set to impact in 2018, the potential CMA referral by the FCA for a market investigation could have a significant impact on the industry and asset management firms. If a market investigation goes ahead there is likely to be an intensive 18-month in-depth review which will include data gathering, site visits, consultation and hearings. Plenty then to occupy ourselves as we kick off 2017.

Simon Collins is managing director at Eversheds Consulting