Cometh the Assessment, Cometh the Value

Despite having every appearance of next year’s task, the measures from FCA’s Asset Management Market Study are on the very verge of intruding on our daily lives. Not only do the authorised fund managers, targeted by the new requirements, have to source, select and appoint Independent Directors within the next twelve months, but as the end of September fast approaches, so the FCA’s Assessment of Value starts to come into play. It bears all the hallmarks of a measure born to sneak up on the unwary.

The kindly and comforting words of FCA’s Policy Statement (PS18/8), tell the world that the regulator has generously extended the implementation delay by six months, to the end of September next year. But look at it from the other end of that telescope and you see that as from 30thSeptember of this year, funds will, month by month, begin their first affected period. While publication of the assessment may remain some way off, the time-slot reported on will be under way.

How nasty is the surprise in store?  That depends. It depends on the story that the assessment has to tell. It may be reassuring or it may be revealing. Whichever it is, a wise manager will want to know what to expect. It is a reasonable bet that it will be only as the year draws to a close that some managers recollect the need for the assessment and only then discover what it is that they will need to broadcast to investors about the value that they have received. The assessment, covering, as it must, quality of service, performance, costs, economies of scale, comparable market rates, comparable services, classes of units, and the steps taken to tackle any inadequacies, may make grim reading. While some may fall into that trap, others will plan ahead, using the pre-storm lull to determine the shape they want the assessment to take, the process of formal review that will be applied (and duly recorded in revealing detail for posterity and regulator alike) and the vexed question of who it will be that constructs the assessment, separately for every share class of every authorised fund.

And does this wait for the year to begin? Preferably not. Where the fund year ends on 30thSeptember, the decision is foregone. Where more time allows, managers will be able to experiment with different structures and to consider the anticipated outcome before the year has begun. That way changes can be made before difficult features become the subject of published self-criticism.

Some will go with the appointment of an external assessor; others will recoil in horror at the very idea. Surely an external body will be expensive and inflexible, awkward and determined to find fault. Some might, but plenty won’t be. A good assessor should be sensitive to his clients’ needs, recognising though that a fudged assessment will attract the eye of the regulator and probably the press as well. Rigour and honesty will be essential standards but so too will realism in a competitive world where profit should not be a reprehensible embarrassment. There is also the thought, and a real possibility, that investment advisers regard an external assessment as an important choice factor, doubting the adequacy of the in-house version.

And where will the Independent Directors stand on this question? Duty bound as they will be to provide input and challenge as part of the firm’s assessment, they may insist that it is they who select the assessor. That, when published, should send a powerful message that this is a house that takes its duty to investors seriously.


Posted in: Assessment of Value, Asset Management Market Study, FCA
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SMCR: The Hidden Jewels

Most large organisations are given to a degree of boastfulness about how professional they are, how unique, how generous, how green, how even-handed between employees. FCA is no exception. Indeed, it is required by law to tell us how its rules avoid discrimination of any conceivable kind. It is the very model of political correctness. And yet, there are moments when FCA’s most important work is carefully buried in obscurity, under a vast pile of words, drawing the eye away from the nuggets.

Following the shower of FCA papers on SMCR published this month, it is now becoming clear that the headline elements have fully succeeded in their purpose of attention-grabbing, but that some of the most important features have passed almost without notice or comment.

Take the impact of the conduct rule. There can be few firms that are not now aware of COCON, the FCA’s nearly new Code of Conduct. It applies already to banks and it will apply to everybody else from late next year. So, what is new about a list of high level obligations that look remarkably like the Principles that have been in place for decades? Wherein does the big change lie?

It would be tempting to say that what was changing was a shift from duties on firms to duties on people. But, as soon as the words are uttered, we have to acknowledge that it is not so simple. For years we have lived with APER, the Statement of Principles and Code of Practice for Approved Persons. It too contains rules that apply to individuals and look remarkably like the long-standing Principles for Businesses. Even the responsibility element is not new, as any approved personperforming an ‘accountable higher management function’ could easily tell you. So, is it just re-arranging the deck-chairs to conform to Parliament’s intervention after the banking crisis? Well, yes and no.

For senior managers, the SMCR rule changes are not that substantial. The Statement of Responsibility may be new but it is little more than an evidential document designed to facilitate enforcement action, with the incidental advantage of improving the clarity of many management structures. The key for this group lies in the shift in regulatory intentions – holding senior managers personally responsible for failures on their watch. Watch this space. There will be tears before bed.

The material change lies elsewhere. In the old days – the era we live in that comes to an end on 9thDecember 2019 – those exposed to FCA sanctions had signed-up on the momentous occasion that they acknowledged formally that they were applying to take on a controlled function. That wet signature was unmistakable, a blank cheque to FCA. In the new world affected individuals may not know who they are. COCON applies to all employees of any FCA-regulated firm (with very few exceptions) unless their role is purely ancillary. They will not have signed an application to FCA, they may not have been forewarned, they may not know or understand what is required of them. The employing firm is obliged to inform and train them – and the good ones will do so. Has FCA gone out of its way to focus attention on this? Most would say, from what little has been said, that they have not.

While no one can accuse FCA of failing to articulate its plans for the new regime, the Regulator’s focus is on practicalities. Diligent as ever, FCA is laborious to a fault about the transitional process from old to new. All of that should be well-received by the managers charged with implementation. However, when it comes to the Regulator’s expectations of the conduct of individuals, much less is said, with the most valuable guidance given the least visibility.

In a short and obscure Policy Statement (PS18/16), FCA confirms that it has extended the application of key guidance to senior managers of firms not previous covered, through definitional changes mentioned in its previous Consultation Paper, but actually set out elsewhere. The guidance itself is, of course, not worthy of further mention. Not by FCA anyway. So let me dilate.

The guidance addresses the key question of what a senior manager is expected to do to discharge his duty of responsibility to prevent breaches of regulations within his domain. Managers may like to know what the Regulator is likely to consider and the FCA answers that question. Deep within the Decision Procedure and Penalties manual (DEPP), FCA sets out 18 questions, relating to the conduct of a manager, that it would expect to consider when looking at the manager’s culpability for breaches. Arch-cynics will say that this is then buried, as it undoubtedly is, in order to catch managers knapping. The truth is both simpler and duller. For legal and practical reasons, rules are published and then not repeated unless subject to change. The fact that this guidance becomes applicable to many thousands of newly appointed senior managers is apparently not reason enough. Nevertheless, many would say that no senior manager should leave this guidance unread.



Posted in: FCA, Senior Managers Regime
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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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