In a speech addressed to the asset management sector on 23 May 2024, Ashley Alder, Chair of the Financial Conduct Authority (“FCA”) outlined the FCA’s agenda. The speech comes seven months after the Regulator last outlined its approach towards the sector, building upon key elements. In particular, the speech covered how the FCA intends to meet its objective for competitiveness, growth and confidence, by modernising the regulatory framework surrounding buy-side firms. In this article, we set out the key takeaways from the speech and what we may expect in 2024/25.
Smarter Regulatory Framework:
The FCA is in the process of examining and possibly amending laws inherited from the EU, including UCITS, AIFMD and certain aspects of MIFID. The feedback from DP23/2, published last year, indicates a preference for alignment with EU rules for retail funds under the UCITS framework, which is understandable given its widespread acceptance in financial services regulation. On the other hand, the potential for reform away from the EU seems more pronounced in the realm of alternative investment fund managers, where the AIFMD regime’s broad coverage of fund management activities presents opportunities for more of a proportionate approach.
The UK’s asset management regulatory reform will consider the diverse landscape of investment funds and managers, aiming to set clear and coherent requirements that are proportionate to the risks of different business models. This approach acknowledges the varying capabilities of institutional investors to manage risks and seeks to ensure that reforms are pursued only when they offer clear benefits, supporting the UK’s commitment to high standards and international compatibility in the asset management sector.
Private Finance, Non-Bank Financial Intermediation (“NBFI”) and Valuations:
In light of rapid growth in international private finance, the FCA is contemplating the necessary tools and data required for the efficient oversight of NBFI. The term ‘Non-Bank Financial Intermediation’, or NBFI, is used to describe everything from private equity to hedge funds and other sources of non-bank finance. The FCA notes that there is potential for inflated values to support borrowing, avoid covenant breaches, uphold fund performance and fundraising. When liquidity is offered to investors, this can result in unfair redemption pricing.
To combat these risks, the FCA is actively engaged in domestic oversight activities concerning asset valuations and is co-leading a collaborative effort on leverage within the non-banking sector under the global Financial Stability Board.
Retail Investments
Notably, Alder touches very briefly on retail investments. The essence of his comments is that the FCA welcomes the revocation of the Packaged Retail and Insurance-based Investment Products Regulation (“PRIIPS Regulation”). Next steps here are that the FCA intends to consult on establishing a new framework. This framework will be well-suited and specific to the UK market and its products, enabling companies to create a consumer journey that is more engaging.
Sustainability Disclosure Requirements (“SDR”)
The UK’s new disclosure and labelling framework aims to create a system that bolsters investment confidence, particularly for environmentally focused investors. It also ensures that consumers can trust the authenticity of firms’ claims regarding sustainability.
The FCA acknowledges that SDR is already an established requirement worldwide and more so in the EU. They have aimed to develop consistent and compatible regulations here in the UK in order to keep disruption to a minimum. As the FCA continues to widen the scope of their SDR, this principle remains at the forefront of their development. The Regulator continues to collaborate with various international counterparts as they introduce similar rules. Furthermore, the FCA is currently engaging with HM Treasury as it considers extending the regime to overseas funds.
Innovation
Finally, a major focus of the FCA has been technology and the opportunities presented by its utilisation. One area in particular is fund tokenization. There is growing industry interest in the commercial benefits of fund tokenization, especially in the asset management sector. In response to this, the FCA is working with the governments’ Asset Management Taskforce and Technology Working Group, which is working on implementing tokenization in the UK. It is expected that the FCA will adopt the Working Group’s report recommendations and has confirmed it will implement these changes as and when they are approved to the FCA Handbook.
The FCA has flagged that it will continue to monitor its objectives within the Asset Management sector, updating and reforming its approach. At Complyport, we work with many firms in the Asset Management sector and are well placed to help ensure your firm remains compliant. We understand it can be a time-consuming process to keep up with FCA’s speeches and publications and can assist firms to monitor updates and advise on wider actions needed where necessary.
How Can Complyport Help:
At Complyport, we specialise in helping Wealth Management firms meet their regulatory obligations. Our guidance ensures that both firms and individuals stay compliant.
Our Services:
- Consumer Duty Services
- Compliance Monitoring reviews
- Financial Promotions Reviews
- Implementation Guidance and Advisory services
- SDR/ESG Readiness Assessments
- SDR/ESG Review against categories
- Policy and procedure updates
- Ongoing full scope compliance support for Buy-side firms
- Staff Training
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