Grid Grind

Do you remember the good old days when FSA used to publish Policy Development Updates worthy of the name? It was something approaching a comprehensive list of forthcoming publications, providing a really useful, at a glance summary of what to expect over the next year. Yes, plans changed a bit from time to time, but it was seldom far off the mark. Since then, of course, we have had what FCA pretends is the same document, but it leaves out most of the information. Attempts to get them to restore the useful version have completely failed – far too much like hard work. But, even if they can’t be bothered to do it properly in their own name, they have finally had to relent when, combining with all other financial services regulators in town in the FS Regulatory Initiatives Forum, they have needed to produce a new Regulatory Initiatives Grid (RIG). Admittedly it is pretty well C19’d but it is a promising start.

Actually, it is a bit better than that. Published this month for the first time, the RIG provides a forecast – 12 months now, to be 24 months shortly – of all the planned regulatory initiatives due to emerge from HMT, BofE, PRA, FCA, PSR and CMA. To have all this drawn together in one succinct document is a valuable resource, which should be leapt on by trade bodies and financial services groups and anyone else that needs to track developments and stay on top of regulatory change. One of the most important aspects of this is its Brexit linkage, at a time when so much legislation and regulation needs to be novated to take account of independence.

Of course, for some there will be no need for this – they know everything in the public domain and all the rest as well. But for the rest of us, there is much in there that jogs the memory, updates the most recent recollection, confirms the expected or is just plain news.

Largely without over-ambitious diagrams or meaningless graphics, the RIG has clear sector listings. Therein we find the Duty of Care, the overlapping and interfering regulation that FCA tried so hard to kick aside but which inevitably caught the eye of the parliamentarians, who now can’t live without it. Deferred, presumed undead. There too is the Future Regulatory Framework Review, HMT’s little look at how we might regulate financial services in tomorrow’s world. Sometime next quarter we will see ‘formal engagement’ on that. Operational Resilience gets a predictable mention as does LIBOR Transition; both inevitable, neither exciting. Outsourcing gets another outing, this time with new technology in mind, while the Investment Consultants, due for Regulated Activity status shortly, get an indefinite reprieve – so, not as shortly as we thought. Then it hots up a bit. The Investment Firms Prudential Regime is picked up: ‘to be included in the upcoming Financial Services Bill’. Not a mention of any EU version thereof, but bound to reflect. There too is what looks like a retrospective reference to HMT’s consultation on the Overseas Funds Regime. It almost slipped away unnoticed, so the RIG may have rescued this one, albeit posthumously.

Although ostensibly dealing only with recognition of overseas funds for promotion to UK retail investors, the OFR (Overseas funds regime: a consultation – GOV.UK) is the UK’s principal exposition on what to do with equivalence. HMT clearly intends to rely heavily on FCA assessment. Just as Andrew Bailey, before moving onto to higher things, used to speak frequently of equivalence of outcome, so too does HMT. Wisely reserving ultimate authority over equivalence decisions to itself, HMT clearly intends that the UK should be able to play retaliatory politics whenever the EU gets up to its predictable tricks. This paper is all about the future FCA ‘recognition’ of funds for promotion to retail investors in this country, an area heavily affected by the Brexit removal of automatic recognition of all UCITS. Armed with equivalence and expecting most applications to relate to EU27 UCITS, FCA will find it quick and easy to tick the recognition box. But real success will look like extensive equivalence decisions for the wider world, opening reciprocal opportunities for the promotion of UK funds in fruitful regions.

Also among the Brexit opportunities is the future structure of authorised investment funds, expected to be covered in the Review of the UK Funds Regime, RIG-listed as sine die. Thanks to the dominance of UCITS, the sector is split simply into UCITS funds and non-UCITS funds (NURSs). While that, today, means those with an EU passport and those without, we are now at an inflection point. Barring some miracle, passports pass away at New Year and UCITS domiciled in this country cease to warrant the title. With that as an inevitable Brexit consequence, we have choices to make. Consider:

  • Accepting UCITS as the global standard for retail funds, retaining the restrictions in UK regulation and following the EU with dynamic alignment wherever it leads;
  • Using UCITS by borrowing the standard, piggy-backing on the EU while developing a superior brand that might put UK funds into the lead at home and away; or
  • Dropping UCITS as a regulatory concept, allowing a more flexible approach to authorised funds with a regulatory perimeter but free movement within, spanning the UCITS-NURS divide.

Convenient as the UCITS brand might be, whether for its inherent value or simply its established profile, there is a respectable argument for denouncing the concept of the regulator as brand manager. Of course we place no obstacles in the way of those wishing to adhere to the UCITS standard, committing themselves, if they wish, to dynamic alignment. But that assumes that a UCITS from a jurisdiction with no regulations reinforcing the brand can be fully trusted to adhere to the landmarks. Despite the notorious indifference of the Luxemburg regulator to enforcement of fund requirements, or even to serious investor protection, perception, based on the official position, may prove to be too strong for the survival of the brand without regulatory support. Such a step would be quite brave. This may become a rare example of the industry imploring the regulator to keep rules in place. And not just as is, but dynamically aligned.

So, if UCITS are to be retained in the UK, what scope should be available for NURSs? There is in this space something approaching congruence between the interests of the industry and the duties of the regulator. If UCITS can be improved on, as FCA has said in recent time, and the EU is uninterested in serious enhancement, firmly asserting the perfection of their handiwork, it feels like a tantalising opportunity to develop a UK brand. Just ensure that it addresses all known weaknesses and stays safe and suitable for retail investors, enshrine it in regulation and then allow it to compete with UCITS in a world of equivalence.

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