News

Mar13

EUCITS or BrUCITS

As we prepare (or not) to leave the EU (or not) at the end of the month (or not), we have to hope that the agencies of State, including the FCA, have got it all worked out. Strangely enough, this form of activity appears to be something that our bureaucrats are actually rather good at. Competence, Caution and Care could almost be their motto. For that reason, however difficult two parliaments and at least one Commission try to make it for them, some of us remain optimistic that Brexit is not going to be a disaster.

A fine example of CCC is the MoU between the FCA and EU27. As with so many really vital developments, the announcement of the MoU agreement was made with no fanfare, either from its creators at FCA or from those who will, between them, over time, reap billions therefrom. While all the talk had been about Equivalence, the measure to avoid the delegation crisis that the awkward squad was happy to foster in its attempt to divide and rule, was ‘supervisory cooperation’, the very purpose of the MoU. While many were wisely and properly pointing out that ESMA had arrived at its quite apolitical opinion that delegation after Brexit would be the greatest threat to EU civilisation the world had ever seen, that ESMA would ensure that national regulators all around the bloc would see off the untrustworthy hordes of investment managers free-running outside the platinum curtain, others suspected from an early stage that the threats to delegation were empty.

But can we really say that the MoU has entirely neutralised the risk? Perhaps not. Perhaps the European Commission will come forward with new measures to put higher hurdles in place. Perhaps the regulators in Luxemburg will suddenly discover a vocation for regulatory enforcement. Perhaps EU governments and populations will be happy to have to buy funds that can’t employ the world’s best investment managers. But probably not.

After all, ask yourself how this MoU came about at this crucial moment. Less than two months before a possible no-deal, the near impossible task of arranging 27 bilateral agreements was obviated by central coordination by none other than ESMA, directed by Sir Howard Davies’ (former FSA chairman) former private secretary.

So much for management. But what about the marketers? Their lot is looking a great deal less happy. As matters stand, there will be no means by which UK funds can be marketed to EU retail investors. A fund domiciled in beastly Blighty will, even where it adheres perfectly to the UCITS limits, even where it has for years been deemed fit for EU consumption, will be an AIF to be treated with all due suspicion from Brexit day itself, if we depart without a transitional period designed to defer the moment of truth.

Well, at least it will keep out EU competition. But not so fast! Being the good citizens that we are, we will have the Temporary Permissions Regime, which will allow, for a year or three, EU funds to continue to be marketed here, just as before. Not for us the instant barrier or pretence that risks have somehow changed overnight. EUCITS will still be sold on the streets of London while BrUCITS could be banned from EU Strasse. The FCA has hinted that this might not be ideal, that consideration might usefully be given in the salles to provisions that would provide time for mature discussion. The industry itself has remained pointedly silent, either out of bravado or for fear of waking the ogre.

Let’s be clear, the question is this: what sort of a deal for EU access for UK funds might be realistic? The debate has not raged, but the question stands. The industry, so prolix in its trepidation at losing the passport, has suddenly decided to play the Trappist monk. Looking forward, as we always do, of course, we need to identify the solutions we seek. Suppose the FCA maintains a regime which shadows UCITS indefinitely. And suppose, having committed ourselves to pure rule-taking in that area, we propose to permit EUCITS access to UK retail investors on condition of reciprocity, what would be the outcome? We might or might not get agreement, but that will depend on how hard we try, how concerned EU manufacturers become over the future of access to the UK and whether the EU remains governed by the purist high priests of the single market or whether the already-detectable winds of change introduce a degree of pragmatism into European thinking.

Some would say that rule-taking was unacceptable and that this would be a compromise too far. That too seems to be a purist approach of no real weight. Then, as now, UCITS would be an optional regime for fund managers, bringing benefits in the form of EU access. The choice would remain, as now, of alternative forms of UK retail funds, a range that might well be expanded over time as FCA gradually recovers its initiative and develops new and varied retail funds, attractive to the world, even if not to the platinum prisoners. Whatever the state of the NHS, there will always be NURSs in town.

 

Posted in: Brexit, ESMA, EU, FCA, UCITS
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Jan24

The Year of the Senior Manager

The FCA’s major programme for SMCR is proceeding apace…. despite Brexit. SMCR implementation is a challenge for nearly every FCA-regulated firm. Related training is one aspect of the regime. The training is not just mandatory, but essential. The impact of SMCR affects everyone at the firm and wide-scale involvement from an early stage helps to ensure strong buy-in across the business. OWL training for clients is firmly under-way. We offer a tailored programme to firms implementing the new regime.

Posted in: FCA, Senior Managers Regime
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Jan4

2019: All about Brexit?

Is 2019 the Year of the Brexit? Yes, maybe, no. Brexit may happen in 2019, or it may not. Whatever. Either way, it might not be the greatest regulatory challenge that we face this year.

Granted, we don’t know what form Brexit will take, but we do know more than we think. We know that if Parliament decides to ignore the will of the people and withdraws the Article 50 application, we will not leave and wonderful EU regulation will continue to apply. Relief all round. We can continue with PRIIPs, GDPR and the innumerable other blessings of EU membership.

We also know that if Parliament buys the Government’s Withdrawal Agreement, we will have a transition period (aka Implementation Period), in which EU requirements will continue to apply, until at least December 2020. Another easy one – PRIIPs, GDPR, universal rejoicing. But if that does not happen and we are released in less than three months from now, the FCA’s cunning plan is that there will be no change to the application of EU requirements, at least for the time being. And the Government will allow every resident EU national to stay for at least five years. And PRIIPs with everything.

So, what is there that we don’t know? Some may not be entirely confident that there won’t be a petulant reaction from the European Commission. Improbable as it may seem, it must be possible that if their attempts to thwart our departure fail, they may look for ways of turning independence into ostracization. Although strongly promoted by the alarmist tendency, the tactic of blockading their own exports has always seemed a little far-fetched, however gratifying the masochists might find it. Blockading UK exports seems a great deal less improbable. It is fair to assume that the equivalence of our regulatory regime will elude EU notice. But the FCA’s MoUs with key EU regulators will provide clear evidence of ‘supervisory cooperation’, ticking that important box which enables delegation. Selling to EU residents may be difficult, but doing business with EU business is unlikely to be seriously disrupted.

So, what is it that is going to preoccupy our attention in 2019? Let’s begin with SMCR.

With under a year to go before the regime is in force, if a firm’s programme is not underway yet, its time has come. There are choices to be made. Will the firm be implementing as late as possible or will it adopt as soon as ready? Is the message about risk and threat or is it about empowerment and responsibility? Will it be forms and admin or structure and governance? Persuasion or coercion? It does not have to be a tale of woe.

But there are mandatory ingredients. As the regulator takes a big bite of new power in the form of its extended disciplinary reach over all financial services employees, so education becomes increasingly essential. That it will also be compulsory is of little more than academic interest. Enormous numbers of people working in the financial services sector, for several decades in many cases, have never touched the level at which they would need FCA approval but will now be exposed to the risk of FCA fines and bans. For them, as for many others exposed to changing obligations, a proper understanding of the regulator’s expectations is fundamental.

The senior managers themselves, most of whom have held Controlled Functions in the past, will experience big changes to the duties that they must fulfil. Direct from primary legislation, the duty of responsibility, applicable to every senior manager, will predictably become an unanticipated means of admonition. Those unaware of the FCA’s guidance on how the regulator will determine when and where to take action will be unready to defend their conduct when challenged. As with so many aspects of regulation and compliance, records and routines go a long way towards demonstrating that duties have been fulfilled. Individuals need guidance, education and training.

But if SMCR is the main show in town, it is not the only one. For many, the fallout of the Asset Management Market Study has gone largely unnoticed. That may well change in 2019 as fund management firms struggle to get good Independent Directors into place in time for the September deadline. While non-execs are usually regarded as easily come-by, keeping them at bay being the greater challenge, it may be different this time round – the regulator will be counting. If, as September approaches, appointments have not closed in on the required 500, there will be closer analysis. Who has not done their bit? More needed and quickly. Hurry, hurry, even if stocks are exhausted.

While Independent Directors may come in twos, assessments of value will come by the half-dozen. Working to the same timeframe, as each authorised fund reaches its year end after September, the bell will ring for its first assessment. But what will they really look like? No one yet knows the answer to that simple question. As one of the few novelties in the field of regulation, assessments of value will command some curiosity. Among the most interested will be the investment advisers, whose job it will be to take notice of the assessments. Will they take them seriously or will they laugh up their sleeves at a self-assessment published with hubristic comments about the immeasurable worth of access to such unique talent. It is, apparently just like every one of its competitors, a benefit beyond price. Was that ever in doubt, even as the fund underperformed? Did the manager have any critical remarks at all to make about the quality or cost of the services for which the investors had the honour to pay? Some assessments will be rightly the object of ribald cynicism. Others though, will be seen as honest evaluations. Perhaps the frank remark will be the one that attracts the investor.

So, while it may be, possibly, just, that Brexit commands the headlines more readily than even SMCR, the scales may tip quickly after March as we wade out of the Brexit fudge to the sunny uplands of the statements of responsibility. By then, one thing will be clear, neither will go away.

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