FCA Reviews

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


Liquidity management

“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.


Firms’ governance

“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.


Product governance

“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.


Operational resilience

“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.

 Market abuse

“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.





Posted in: Assessment of Value, Asset Management Market Study, CASS, MAR, MiFID, Senior Managers Regime, UCITS
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Happy New Decade

At the beginning will be Brexit. At the end will be Brexit. And in between it will mainly be Brexit. I hope that those remarks relate to 2020, not to the whole decade, but I am probably wrong. There will be no escape from the great escape.

But where I really hope we are wrong is in expecting the worst. Certainly Brexit will present many challenges, but the Brexit optimists among us, including the new government, view this as a new opportunity. We have lived without passports before and we will have to do so again. We will focus much more on the world’s fastest growing economies and we will fight protectionism wherever we find it. More and more and more of this anon.

Swiftly moving on, or perhaps back, it is tempting to think of SMCR as so last year. However, as we know, the ever considerate FCA has staggered implementation, ensuring that there is still some SMCR to enjoy in 2020. Certification and Conduct Rules training spring to mind as aspects to follow on, but, and in many ways more importantly, proper embedding of the senior managers in their new circumstances is also a must for this year. Has each one got a copy of the DEPP guidance pinned to his desktop? Are they ready to answer the question of how they, as an SMF manager, have taken “such steps as a person in their position could reasonably be expected to take to avoid the contravention of a relevant requirement by the firm occurring (or continuing)” ? If the FCA come to visit, they are likely, on that occasion, to express their views in plain English.

And talking last decade, the Asset Management Market Study may now feel like ancient history, but in truth its key aspects, Assessments of Value and Independent Directors, are bound to be making the headlines in 2020. At some point in the year, every authorised fund will have to be assessed and publicly reported, with invaluable and prescribed input from the Independent Directors. Will we see rigour accompanied by a degree of self-flagellation or will there be whitewash on every webpage? Better the former – the latter will not avoid the flagellation; it will merely transfer its administration to the FCA. And first in line for the cane will be the Independent Directors.

The bizarre introduction of the requirements of SRD II, published only days before implementation, will not preclude a more robust approach in 2020. Even those who managed to publish a substantive engagement policy before the Christmas party will, this year, be facing the need for their first annual disclosure. How did you vote in those non-routine corporate ballots? We must be told, as must the press and the activists, unless, of course, the firm is ready to explain its non-compliance. Many would say that there were more and better reasons to maintain confidentiality than to comply with rules that FCA admitted it would not have applied had it had any discretion in the matter.

In an apparently genuine coincidence with other developments, FCA produced, last year, new rules for the treatment of funds investing in inherently illiquid assets – these to be implemented in the quiet calm of autumn 2020. Affected authorised fund managers, as well as other firms making mention of FIIAs, will be notifying the happy holders and those encouraged to contemplate taking the plunge, of their fund’s new-found status and what their manager’s smart new liquidity risk management strategy looks like. Even depositaries will be dragged from the shadows to strut their stuff in assessing liquidity profiles, overseeing liquidity management systems and notifying the FCA of anything that FCA would reasonably view as significant. Few depositaries enjoy the lime-light, but guest appearances may become more frequent.

Audience participation is invariably tiresome, but there may be some scope for dedicated spectators this year as well. Take the role of FCA CEO. Or rather, don’t. The most poisoned of all chalices may be up for grabs this year, but our recommendation is leave it for someone else. Don’t be tempted by the money. Don’t be tempted by the glamour. And don’t expect that taking the job will lead you to the Governorship a few years later. Keep this one firmly in the spectator category and see who falls for it.

Clearly we should also expect to see some sparks from the sweeping up of the Woodford car-crash. While a great deal has been said about this sorry saga, there is also much that we do not know. The challenge facing the regulator is to be seen to do the right thing while avoiding the easy trap of judging with the benefit of hindsight. Pressure from Parliament will be piled on and more than a few in the industry would have no regrets were some of the players to be humiliated further, but the regulator is quite experienced at not pleasing the crowds and will need to keep a very steady nerve as it publishes its conclusions. Whether this will be the end of the career of some hapless interim FCA CEO or just a  hospital pass for the new girl on the block remains to be seen.

Final thought for the year: prepare to hear further about the acquisition of research. After its blithe note about its alleged review last autumn, the FCA has held in reserve a number of points that it will want to make. While it struggles under the yoke of the EU, it must work with the clumsy drafting of its own intentions as distorted by the EU27 and unheard-of numbers of translators. Once freedom of speech is restored to the FCA, we should expect  its views to be clarified in all its favourite areas, of which this is firmly one. It may concede that the original drafting was so poor as to be unactionable, but it will, by then, have a little list of those who need to try harder. So, for 2020, it may be no names, no pack-drill. Nothing like having something up the sleeve for 2021.

With all the fun of the year, we are here to help.


Posted in: Assessment of Value, Asset Management Market Study, Brexit, EU, FCA, MiFID, Senior Managers Regime, UCITS
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Stressing the Directors

As we may have mentioned before, the FCA is a trifle concerned about the liquidity of investment funds. Some would say that the threat to the career of its Chief Executive was good reason for the organisation to focus the minds of its many employees, and even of those beyond its Stratford bunker, on this important matter. So it is that FCA has issued to all Authorised Fund Managers a call to arms. And true to expectations, clearly embedded in the regulator’s missive (Effective Liquidity Management) is an early message to Independent Directors. Their honeymoon, only begun in October, is officially over.

The other reason why is also not hard to see. While any measures, relating to the Woodford implosion, taken against firms might be expected to be the message, enforcement action takes time, running the risk that there is another car crash before the previous one is swept up. UCITS managers must be alerted to short-comings unearthed in the course of the dig taking place at the ruins of the Woodford fund. Those who thought that all this was covered just a month ago in the Policy Statement on illiquidity in open-ended funds need to stay with the plot. That was dealing with NURSs; now it is time to tackle UCITS.

The letter’s main point is the obvious one: that the responsibility for compliance with the fund regulations lies with the Authorised Fund Manager, the FCA-regulated firm that is the focal point of the fund’s constitution. Whomever they may have selected to work the magic for them on the investment portfolio, they, the AFM, are absolved of none of their responsibilities. And the Independent Directors sitting on the AFM Board would do well to remember that fact. Pleas for a review of liquidity management arrangements are peppered across the not-very-long letter, but none is more pointed than the last, saying “Please review your firm’s practices as soon as practicable to ensure you and your fellow AFM Board members are comfortable they are appropriate.” If the practices aren’t, the Board members may shortly not be either.

As if to reinforce the point repeatedly made by Andrew Bailey, the notion that regulation should be pitched at a higher level with less how-to-do-it instruction is brought to life in the letter’s emphasis on the need to ensure that the liquidity of an investment, whatever its listing, does not compromise the AFM’s ability to redeem units in the fund. Don’t lose sight of the big picture while you enjoy the exceptions, the qualifications and the encouraging guidance. But remember also that this is a coin of two sides: why commit yourselves to daily unit dealing if the fund’s strategy is longer-term investment? Attracting investors with hard-to-keep promises may end in tears all round.

For the assistance of those inclined to question what it is that FCA is really looking for, stress testing is twice stressed. Many AFMs will not have participated in this, hitherto, minority sport. The challenge is to know how far to go and what to do with the results. Bearing in mind the key phrase of assessing the impact of ‘extreme but plausible’ scenarios provides some guidance on the former. And as for the results, they should tell you at what stage you will need to ring the alarm bell, triggering your crisis management plan, but preferably the one that precedes suspension.

The letter is sent to chairmen, the warning is addressed to the whole Board.

Originally published by Thomson Reuters © Thomson Reuters

OWL Regulatory Consulting is the adviser to the investment industry on matters of regulation.

OWL Regulatory Consulting

Posted in: Asset Management Market Study, EU, FCA, UCITS
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