The Thought That Counts

Through its recent publications, FCA is starting to tell us how it will handle Brexit in practice. Wisely they continue to steer away from the politics, but quite rightly make clear their practical preferences – FCA’s job is, after all, to ensure that markets work well. Major disruptions and contract discontinuity might not quite fit the bill.

Alongside a massive pile of technical standards, FCA has published its approach to No Deal (CP 18/29). The discussion begins with a comforting description of the benefits of the implementation period, which FCA prefers to think of as the transition period, but which, in the event of no deal, will not materialise. To help to mitigate its disappointment, were such a situation to arise, the FCA will create its own transition period. Those who see this as a Treasury-led programme should think again – the Treasury Regulations have the FCA’s fingerprints all over them.

On the face of it, these are measures for EEA firms – a classic act of UK generosity in the face of studied hostility. Should we even care what is going to become of inward passporting firms, given that this refers to a scenario where any plans for equivalence will have failed? Those who feel most aggrieved about the loss of their EU access may feel disinclined to help those who have not helped them. As FCA says:


“Without other rule changes, firms currently passporting into the UK that choose to participate in the TPR will have to comply with the Handbook as Part 4A firms (whose head or registered offices are overseas) because of the TPR Regulations. This would be challenging for many firms given the short time until exit day……………….”


It quite makes your heart bleed. The opportunity to make a show of generosity with forked tongue is sorely tempting. Why make it a comfortable ride for them, if we get no ride at all? Unfortunately, it might not go down hugely well with affected consumers.

There is a better reason for looking at the plan: it covers how EEA domiciled funds can continue to be marketable here. Many of those funds are of course the creation of UK firms and have their assets managed in London. While alternative arrangement could certainly be made for similar offerings aimed at British consumers, much time and money would be saved by continued easy access.

The FCA’s cunning plan is to maintain the status quo, for the time being at least. Classically, that which sounds so straight-forward requires the whole Temporary Permissions Regime, from Statutory Instrument to FCA Rule. But let’s hope that the rules were well understood beforehand, because the chances of anyone understanding the requirements from the proposed structure of the TPR seem very slight indeed. The sensation that the FCA’s heart might not be entirely in this task is overwhelming – all a far cry from the spoon-feeding that we are used to where, in the Regulator’s constant attempts to minimise misunderstanding and non-compliance, jolly application tables provide everything except the name of the call centre operator who will, if spoken to nicely, read the rules to you in dulcet tones. Given their fervent hope that none of this will ever come about, it is not difficult to understand why FCA may not have applied its best efforts to drafting requirements that make any pretence at user-friendliness. Establishing the application of a rule imposed (or not) through the TPR will be a lawyer’s dream.

Anyway, if you don’t take anything else away from this Consultation Paper, and you probably won’t, there is one key message not to be overlooked: if you miss the window and don’t notify the Regulator before Brexit that you want to go on accessing the UK, that could be the start of a very long holiday.


Posted in: Brexit, EU, FCA, UCITS
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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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