The City Needs More Ambition

Where is the City’s ambition? Some consider the City to be the home of ravenous ambition, both individual and corporate. That might be true, but it is not the question of the hour; that question relates to the City as a financial centre, as a financial jurisdiction and as a hugely important part of the nation’s economy. What does the City want in the new life, post Brexit, that this country has chosen?

Sometimes you just feel like saying “why bother to ask?” You know that what you will get is a torrent of grief about the damage that Brexit will do to the country, how the City should be at the heart of Europe, how important passporting is and how the EU is going to take us to the cleaners. But that is the last war; we need to look at the way that we are going to use the opportunity, a rare opportunity, to shape our financial regime for the future. That would be so much better than spending the year bemoaning the past.

Citizens are broadly aware that prophets of economic doom have turned out to be quite wrong and that the UK has been the best performing European economy.  Since 2016 thousands of British SMEs have abandoned EU markets but have been winning far more lucrative export contract all around the world.  The key high growth markets for our exports are North America, the Middle East and South Asia.  Exports to Taiwan have grown 40% in the last year.

Nevertheless, the gloom and doom factory is hard at work. Many of the loudest voices, including a number of media organisations, have adopted a strategy, or is it just a habit, of speaking only of privileges lost, contrasting a dark future with a wonderous past, and doing so entirely in the context of doing business with EU clients, as if there were none other. There is also a striking tendency to focus on ways that the EU can damage the City, saving EU negotiators lots of hard work, while ignoring ways in which we can discourage damaging measures, how we can take advantage of the EU’s liking for self-inflicted wounds and how we can maximise the value of financial services delivered to the wider world.

It is a strange thing to see City elders publicly fingering those issues that they hold most dear. The City is supposed to be full of dealers, traders and negotiators. They, of all people, should be alert to the obvious: the more you say you want something, the more the price goes up. Keep on banging on about ‘delegation’ and guess what. “Yes, my friend, you can keep delegation but you must let us have your fish, your marbles and your freedom to …………” You know the story. More effective, perhaps, to talk up ways that the UK can take advantage of any such daft restriction, while repeatedly pointing out what damage will be done to EU-domiciled investment funds if they lose their freedom to choose who manages their assets.  Or we can just to ask where, in the pecking order of EU considerations, features the consumer. Little wonder that the Brussels mob have spawned a raft of populist parties who show they do care about the poor bloody voter.

And there is another strange sight too: how passport-carrying financial directives have moved from being enemies of the industry and the people alike to hot competition for the Seven Wonders. Something of a case study, really. AIFMD springs to mind. Hands up all those who supported it when it was introduced. Bet you didn’t. So, why now so popular? Isn’t it because, since the referendum, it is fashionable to speak highly of the EU? Well, at least partly? But maybe it is also because of the EU’s self-fulfilment. Ever since bringing in AIFMD, in the teeth of opposition, the Commission, with a little help from its friends, has sought to eliminate other means of cross-border business, the very concept that they claim to prize.

So, what is it to be? What does the City want, trying to be realistic and, yes, starting from here? Some would say that dynamic alignment would do nicely. Others might observe that that provides no advantage in global markets and that EU regulation made by 27 nations, most of whom have no discernible financial services industry, might, just might, not be that considerate to a sector that many so dislike. Those of a more competitive spirit might note the opportunities for carefully crafted regulation that works against the interests of the City, entirely fortuitously, you understand.

The alternative, so widely known as divergence, which might arise from our own initiative but also, potentially, through our inactivity while the EU diverges, offers scope. Anyway, that is the way we are going and the City would do well to learn to like it. Yes, there may be a price to pay for diverging – the possible loss of any equivalence generously granted – but let’s measure the pros and cons when we get there, never forgetting that equivalence may have a short shelf-life in any event. Who will tell us what divergence might bring? Whose will be the voice that rattles the EU into trying to buy us off? Then let’s measure the pros and cons and see whether they are paying enough for our forbearance – that would be a change. What might it be? Investment funds that are safer and more liquid? Banking that is the best capitalised in the world? Insurance that is recognised as the best value? Properly regulated lending? Mortgages that truly cross national borders? Improvements to EIS, making it much less demanding for SMEs seeking risk finance? And are the regulators themselves the best we can devise? Answers on a postcard, and a loud one at that.


So, before we cast aside all such opportunities, let’s not forget that the EU itself, while expressing concern that a fully independent UK might plunge into de-regulation, is now looking at dropping recently introduced measures, strikingly including the ban on various inducements. We may not be able to prevent them from racing to the bottom, but there is no need for us to forego our place at the top.


Howard Flight and Oliver Lodge

March 2020


Lord Flight was a Conservative Member of Parliament 1997-2005 and a Shadow Treasury Minister 1999-2004.

Oliver Lodge is a regulatory consultant and an elected Member of the City of London Corporation

This article was originally published in The Daily Telegraph on 2nd March 2020

Posted in: Brexit, EU
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FCA Reviews

As FCA reveals its supervision plans, firms need to pre-empt

No one can say they did not know it was coming. The FCA is getting ever more explicit about its immediate concerns and supervision plans. As we noted at New Year, there is a series of issues that they must be seen to have dealt with, both for consumers’ sake and for the credibility of the regulator. Our forecast is confirmed in the Dear CEO letters circulated by FCA in late January. Within those letters they have provided varying degrees of detail about their supervision plans in each area. In this note we highlight what they have announced they are going to do. Wherever relevant, Compliance directors, as well as CEOs to whom the letters are addressed, are sure to regard these as required reading for all the Board.

How should firms respond to these notices? By getting in there first. If FCA is carrying out a review, the firm should have carried out its own review beforehand. Better by far to have addressed shortcomings, even if only recently. If not that, at least to have a remedial plan, even if the ink is still wet. If that eludes you too, you must nevertheless know your weaknesses. A stitch in time….

Below we highlight the explicit messages from FCA, with a comment or two of our own.


Asset Management Supervision Strategy, FCA 20 January 2020


Liquidity management

“We will continue our oversight of UK authorised funds.”

FCA cites its warnings in its September Policy Statement, its November letter and its December publication of its joint review. It then refers to follow-up ‘appropriate action’. Authorised fund managers not on top of liquidity management can expect little empathy from the regulator.


Firms’ governance

“We will carry out work in the first half of 2020 to evaluate the effectiveness of governance across the sector, focusing particularly on firms’ efforts to implement SMCR.”

After the significant lead time and high profile given to SMCR, the FCA should be expected to take a robust position on related deadlines. Those areas of SMCR that must already be in place will be reviewed for effectiveness within the firm. A key focus is clarity of responsibility, at Board level (of the company, not the group) and at individual director level, along with intra-group conflicts of interest. All long-standing regulatory concerns whose time has come.


Asset Management Market Study (AMMS) remedies (Assessments of Value and Independent Directors)

“We will do work in the first half of 2020 to understand how effectively firms have undertaken value assessments. We will seek evidence of meaningful challenge at AFM boards on proposals made by the executive – including on costs, fees and product design.”

A very prompt supervision blitz planned for this area, with the very first Assessments of Value being published only last month. Clearly they plan to review the rigour brought to the process and, as we forecast at New Year, they intend to see whether the Independent Directors have procured meaningful Assessments through ‘challenge at AFM boards’. Independent Directors who operate as the consumer’s champion will be encouraged; those who expect the regulators to be well-disposed towards Independent Directors may be in for a rude shock. Directors, independent and executive, who have not met FCA recently should be prepared thoroughly.


Product governance

“We have begun a review to assess how effectively new product governance provisions have been implemented across the sector. We expect to complete our work in early 2020.”

The review in question looks at whether funds really benefit the investors, by design and by execution. The MiFID II version of TCF.

“In parallel with our product governance review, we are reviewing how effectively ‘host’ ACDs undertake their responsibilities. We are seeking evidence that these firms can discharge their responsibilities properly, including in the day-to-day management of the fund. We also expect to complete this work in early 2020.”

An inevitable, post-Woodford focus on ‘host’ ACDs.


Operational resilience

“We expect to undertake further proactive work on this theme in the coming months.”

Cyber security has been an FCA concern and persistent theme for several years. Everyone is exposed to cyber risk and firms need to be able to show that they have in-built resilience to enable them to resume normal activity within a timeframe that avoids loss or disruption to customers.


Alternatives Supervision Strategy, FCA 20 January 2020

 Investor exposure to inappropriate products or levels of investment risk

“We will review retail investor exposure to alternative investment products offered by alternatives firms.”

The review is partly about appropriateness and partly about opting-up to elective professional status. Opting-up has long been seen by FCA as a weakness in investor protection arrangements. They will want to see that it is used only where fully justified.


Client money and custody asset controls

“As part of our review of retail investor exposure to alternative investment products, we will also test whether firms that have permission to hold client money and safeguard custody assets are exercising those permissions under robust control frameworks to: 

  • support the oversight of CASS operations;
  • maintain adequate books and records; and
  • operate in a CASS-compliant manner.”

We have not heard FCA express concern about CASS matters for a couple of years. It is making an expected come-back. Expect drains up.

 Market abuse

“We recently assessed the adequacy of market abuse controls in the sector. We visited a number of firms and provided individual feedback. We also sent a questionnaire to a large sample of firms across the buy side. We may conduct similar exercises in the future and may include your firm.

“While we expect firms to strive for best practice, we require firms to fully comply with their obligations under MAR. Where firms do not comply with MAR we will consider the need for enforcement action.”

Only the timing is unclear. Actually, they could also have mentioned the key revision to their Financial Crime Guide.


Market integrity and disruption

“Where firms adopt very high-risk investment strategies, particularly where significant leverage is employed, we expect commensurately high quality risk management controls. We may choose to undertake in-depth assessments of firms’ controls and may involve your firm.”

Controlled risk is one thing. Uncontrolled risks will be hunted down.


Anti-money laundering and anti-bribery and corruption

“We intend to review firms’ systems and controls to mitigate this risk. We will pay particular attention to the risks of money laundering and terrorist financing.”

The emphasis is on controls and procedures to mitigate the risk that the firm is used to commit financial crime. KYC is the main focus. Any attempts to bribe the supervisors may also go down badly.


These are unusually explicit messages from FCA. No nods or nudges – just clear, specific, direct and detailed notices. Firms experience the eternal pressure on Compliance resources in setting up multiple substantial reviews, such as these. Where resources are the problem, OWL is the solution.





Posted in: Assessment of Value, Asset Management Market Study, CASS, MAR, MiFID, Senior Managers Regime, UCITS
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Happy New Decade

At the beginning will be Brexit. At the end will be Brexit. And in between it will mainly be Brexit. I hope that those remarks relate to 2020, not to the whole decade, but I am probably wrong. There will be no escape from the great escape.

But where I really hope we are wrong is in expecting the worst. Certainly Brexit will present many challenges, but the Brexit optimists among us, including the new government, view this as a new opportunity. We have lived without passports before and we will have to do so again. We will focus much more on the world’s fastest growing economies and we will fight protectionism wherever we find it. More and more and more of this anon.

Swiftly moving on, or perhaps back, it is tempting to think of SMCR as so last year. However, as we know, the ever considerate FCA has staggered implementation, ensuring that there is still some SMCR to enjoy in 2020. Certification and Conduct Rules training spring to mind as aspects to follow on, but, and in many ways more importantly, proper embedding of the senior managers in their new circumstances is also a must for this year. Has each one got a copy of the DEPP guidance pinned to his desktop? Are they ready to answer the question of how they, as an SMF manager, have taken “such steps as a person in their position could reasonably be expected to take to avoid the contravention of a relevant requirement by the firm occurring (or continuing)” ? If the FCA come to visit, they are likely, on that occasion, to express their views in plain English.

And talking last decade, the Asset Management Market Study may now feel like ancient history, but in truth its key aspects, Assessments of Value and Independent Directors, are bound to be making the headlines in 2020. At some point in the year, every authorised fund will have to be assessed and publicly reported, with invaluable and prescribed input from the Independent Directors. Will we see rigour accompanied by a degree of self-flagellation or will there be whitewash on every webpage? Better the former – the latter will not avoid the flagellation; it will merely transfer its administration to the FCA. And first in line for the cane will be the Independent Directors.

The bizarre introduction of the requirements of SRD II, published only days before implementation, will not preclude a more robust approach in 2020. Even those who managed to publish a substantive engagement policy before the Christmas party will, this year, be facing the need for their first annual disclosure. How did you vote in those non-routine corporate ballots? We must be told, as must the press and the activists, unless, of course, the firm is ready to explain its non-compliance. Many would say that there were more and better reasons to maintain confidentiality than to comply with rules that FCA admitted it would not have applied had it had any discretion in the matter.

In an apparently genuine coincidence with other developments, FCA produced, last year, new rules for the treatment of funds investing in inherently illiquid assets – these to be implemented in the quiet calm of autumn 2020. Affected authorised fund managers, as well as other firms making mention of FIIAs, will be notifying the happy holders and those encouraged to contemplate taking the plunge, of their fund’s new-found status and what their manager’s smart new liquidity risk management strategy looks like. Even depositaries will be dragged from the shadows to strut their stuff in assessing liquidity profiles, overseeing liquidity management systems and notifying the FCA of anything that FCA would reasonably view as significant. Few depositaries enjoy the lime-light, but guest appearances may become more frequent.

Audience participation is invariably tiresome, but there may be some scope for dedicated spectators this year as well. Take the role of FCA CEO. Or rather, don’t. The most poisoned of all chalices may be up for grabs this year, but our recommendation is leave it for someone else. Don’t be tempted by the money. Don’t be tempted by the glamour. And don’t expect that taking the job will lead you to the Governorship a few years later. Keep this one firmly in the spectator category and see who falls for it.

Clearly we should also expect to see some sparks from the sweeping up of the Woodford car-crash. While a great deal has been said about this sorry saga, there is also much that we do not know. The challenge facing the regulator is to be seen to do the right thing while avoiding the easy trap of judging with the benefit of hindsight. Pressure from Parliament will be piled on and more than a few in the industry would have no regrets were some of the players to be humiliated further, but the regulator is quite experienced at not pleasing the crowds and will need to keep a very steady nerve as it publishes its conclusions. Whether this will be the end of the career of some hapless interim FCA CEO or just a  hospital pass for the new girl on the block remains to be seen.

Final thought for the year: prepare to hear further about the acquisition of research. After its blithe note about its alleged review last autumn, the FCA has held in reserve a number of points that it will want to make. While it struggles under the yoke of the EU, it must work with the clumsy drafting of its own intentions as distorted by the EU27 and unheard-of numbers of translators. Once freedom of speech is restored to the FCA, we should expect  its views to be clarified in all its favourite areas, of which this is firmly one. It may concede that the original drafting was so poor as to be unactionable, but it will, by then, have a little list of those who need to try harder. So, for 2020, it may be no names, no pack-drill. Nothing like having something up the sleeve for 2021.

With all the fun of the year, we are here to help.


Posted in: Assessment of Value, Asset Management Market Study, Brexit, EU, FCA, MiFID, Senior Managers Regime, UCITS
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