Four Thoughts

Prioritisation is frequently a bigger challenge than we realise. It is always tempting to see the process of prioritisation as a waste of good doing time. That of course is to under-prioritise the prioritisation process. An error to which most of us are prone.
With that in mind, allow me to offer a few thoughts on where compliance priorities should now lie. Four thoughts for your penny.

Everyone knows that ‘authorised fund managers’ are going to have to appoint at least two Independent Directors.But there is much less clarity in many places over which firms are caught by this requirement and about whom they should approach and when. Sometimes significant lead times, such as apply with this measure, serve to create a paralysis in which the best drives out the good. Our advice is clear: this is an example of a measure where early implementation provides a definite advantage. Why should that be? Quite simply because some 500 Independent Directors need to be found and secured between now and end September next year – 16 months from now. While there may be plenty of volunteers, there is less likely to be plenty of good candidates. Wise firms move ahead of the pack.

Even if low on the popularity scale, the Assessment of Value,now prescribed in PS 18/8, is innovative. The novelty of this regulatory tool means that there will be much diversity of approach from those who have to generate the assessment and to publish a summary of it. Over time that diversity may well diminish as practices converge, but it will be at the outset that the most significant and challenging questions will arise from the assessment. It might be an untypically high management charge; it might be the need to confront consistently poor performance; it might be the need to review the fund’s strategy of staying close to the index. What will be typical will be the front-end loading of these questions – they will arise the first time the assessment is produced; thereafter, known problems should have established solutions.
That questions how the Assessment of Value is initiated for each fund. The first disclosure required relates to the fund’s year that end on or after 30thSept 2019. That means that every fund has a prior year in which experimentation can be done in confidential circumstances with no obligation to publish conclusions. This is not some deception designed to disadvantage investors – the FCA has provided time to facilitate an orderly introduction and will welcome prior assessments by which the AFM explores the value of its offering and looks for ways to enhance the benefits of using its products.

Whether or not it feels like an old chestnut, FCA has again affirmed, in its Business Plan, its intention to review firms’ success in delivering best execution.What are they looking for? Ostensibly, the regulator’s review is to establish the effectiveness of MiFID II implementation. But there is more to it than that. First there is the FCA’s frustration that the industry has not reacted effectively to the regulator’s extensive guidance from its thematic review of 2014. Too many firms are perceived to have dismissed the review as applicable only to the clueless few. But anything short of a detailed gap analysis will not satisfy the supervisors. Next, there is the appropriate adjustment to unbundling. The removal of research from the benefits acquired through transaction charges, removes the main subjective assessment of value for money. Execution purchased becomes a cleaner and more easily evaluated service. To trump price differentials, other execution factors will have to stand out exceptionally. Price conquers all.
The final aspect that FCA will look at with keen interest is the meaningfulness of the Order Execution Policy. Although never stated as clearly as it probably should have been, the MiFID II measures are an attempt at procuring improvement in OEPs, to add meaning to the verbiage frequently found in Policies of old. And they will also look at adherence thereto.

It is for good reason that FCA has delayed the introduction of SMCR:to give the industry time to prepare. While the temptation may be to view SMCR as next year’s project, the Staley fine (£642k) is a reminder that the regulator expects to make good use of its new powers when rolled out to a wider audience. A principal feature of the regime is the Statement of Responsibility. These keys to the future focus of any challenge to a manager’s discharge of his oversight duties, need careful construction with consultation and involvement at every stage.
But an equally important preparatory step is to ensure a high level of understanding of the regime right across the business. The most widely overlooked aspect of the regime is the application of important parts of it to all professional staff. Despite the name, SMCR applies, for the first time, FCA disciplinary scope to all staff except those employed in support services only. The Conduct Rules may seem basic, but Staley’s expensive offence was a breach of ICR2 (Skill, care and diligence). While FCA gave him the benefit of the doubt in relation to his intentions, it took exception at his failure to consult appropriate experts or even to make a note of the all-important meeting on which he based his decision to hunt down a whistle-blower. And his rather obvious conflict of interest seems to have escaped his attention. Others need to ensure that they are more aware than he. Training is both mandatory and invaluable – it should begin in good time.

Posted in: Assessment of Value, Asset Management Market Study, Best Execution, FCA, Senior Managers Regime
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Another Exciting GDPR Notice

This note affirms that there is life after GDPR.

We at OWL have always taken confidentiality with the utmost seriousness and GDPR does not alter that in any way. Our policy has been and remains that, unless requested by the client or obliged by the law to do otherwise, we provide no information about our clients or contacts to anyone. Anything else would, in our view, be a betrayal of trust, which we would not contemplate.

We bring a similar approach to data security. The data that we hold about clients is material provided to us by them. It is held securely and used only for the purpose for which it was provided.

Our policy on contact with clients and others remains that we occasionally circulate our own thoughts, with the intention of assisting others who may be subject to changing regulations and other regulatory developments. If any recipient of those notes requests that we cease to contact them in that way, we will always respect any such request.

And we hope that our clients take a similar approach.

If you have any questions about our approach to privacy and confidentiality, please contact us.

Meanwhile, let life continue!

Posted in: EU
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Remedies for a Healthy Patient II

Like the links in an apparently never-ending chain, the FCA’s Asset Management Market Study has now produced a Policy Statement (PS 18/8) (PS18/8: Implementing asset management market study remedies and changes to our Handbook – feedback to CP17/18 and final rules | FCA) and, to maintain the flow, a further Consultation Paper (CP 18/9) (CP18/9: Second consultation on remedies following the asset management market study | FCA). With each link, we learn a little more of the Regulator’s intentions. We also see how very narrowly focused its output has become, despite the enormous breadth of the original asset management scope.

The Policy Statement might best be described as a document devoid of surprise. Where we forecast that FCA would stick rigidly to its plans for Independent Directors, it has done just that. Where we forecast that we might see some re-focusing of the definition of value for money, there we find some reshaping of approach. Where it was clear that they were determined to do away with riskless box profits, so it is to be. But where we thought they would have to act to curtail trail commission, they have dared not go.

What drives the Regulator in its crusade is its concern that investors are poor judges of their own best interest. While many will accept that basic proposition, not all will accept that FCA’s solution is the best. As we are told, not just in passing, not just once or twice, FCA takes the view that a fund manager is not ‘just’ a product provider, but also the agent of every investor that becomes a unitholder. This contention leads them forward to their preferred remedies that they have been floating for the past year, with a little more detail with each step forward. While the ‘agent’ assertion cannot be dismissed out of hand, some would argue that, but a few short years ago, widespread intermediation provided a market structure with an IFA as agent, responsible for the selection of products from a wide range of providers.  That separation of roles, while flawed in many specifics with enormous commission-related conflicts of interest, had its merits. But having RDR’d that model out, the Regulator must now make its silk purse from what is left of the ear.

And so, while all but ignoring the very existence and significant potential of the depositaries, FCA has set to work on the AFMs. A brace of Independent Directors – they make clear that they would like to see a cock and a hen – will carry the burden of ensuring, from within the product provider, now aka ‘agent’, that unitholders’ best interests are taken properly into account with every decision affecting the funds’ management. Key to this is to be the Assessment of Value.

Accepting that its consultation proposal for the assessment was too narrowly focused on cost, FCA has broadened its outlook to cover more effectively the quality of the service and performance provided. Or, at least, so it says.  Whether its not-very-radical redraft really changes very much is open to question. We do not know how much private consultation was undertaken before the revisions were published, but our forecast is that this is an area where enhancement will follow in the light of experience over forthcoming years.

A key decision that AFMs will need to make is whether they should outsource this Assessment of Value. FCA gives no hint of whether such a move is one that they would expect or welcome, but it may prove fundamental to the credibility of the process. A hapless junior manager, directed by the Board to prepare the assessment may struggle to articulate with sufficient frankness his views of decisions about an appropriate level of charge, made by the self-same Board in years past, some time before the possibly-disappointing performance emerged as a feature of the fund. Will it be that the greatest contribution of the Independent Directors is to insist on selecting the external supplier of said assessment?

And how good it is to see that, having recognised in CP 17/18 that “recruiting approximately 2-3 Independent Directors per AFM will create a challenge across the industry”, FCA is now (PS 18/8) of the view that they “don’t think that AFMs will struggle to find suitable Independent Directors”. As they explain, this is now not because the directors would need to be able to demonstrate that they understood the FCA’s logic that it was  possible to act both in the interests of the company’s shareholders and (also) “solely” in the interests of unitholders, but that the challenge will be simply wafted away by the introduction of “greater diversity across a range of dimensions: gender, ethnicity, socio-economic background, LGBTI+, age and disability”. So, that’s a relief.


Posted in: Asset Management Market Study, Competition, FCA, Senior Managers Regime, Value for money assessment
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