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
“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.
“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.
“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.
“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.
“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.