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The FCA Business Plan and Risk Outlook 2014 for asset managers

    • Financial services and markets regulation - Briefings and articles
    • Financial institutions

    15-04-2014

    On 31 March 2014, 10 days after it published its new guides to supervision, the FCA published its Business Plan and Risk Outlook for the coming year.  The timing and content of both publications suggest that the FCA is taking a more integrated approach between the way it will supervise firms and the planned thematic work asset managers can expect in 2014.

    We have identified below the main themes from these publications which are relevant to our asset manager clients to enable you to better prepare for regulatory scrutiny in 2014.

    The FCA’s areas of focus specific to asset managers

    The FCA is set to continue its focus on customers, culture and conduct.  Asset managers can expect scrutiny in following areas:

    Conflicts of interest – The FCA singled out the asset management sector as a major source of conduct risk through inherent conflicts of interest.  The FCA , therefore, plans to focus its attention on this area in Q3 2014, although it has yet to determine the scope and date of this thematic work.

    Firms can expect more than just a review of their policies and procedures. It is likely that the FCA will carry out an assessment of the effectiveness of  controls on identification and management of conflicts of interest, with a particular focus on information flows.

    As fiduciaries, asset managers are likely to be probed on their use of client money to purchase third party services. The FCA is likely to look, in particular, at whether firms apply the same rigour and scrutiny when spending client money as they do when spending their own money.  The FCA will probably look at the commercial rationale behind decisions to spend client money, and require evidence that a firm has given due consideration to the client’s position.

    The governance and management of products is also likely to be of interest to the FCA. Interactions between asset managers and investment banks and third parties, as well as an assessment of the continuing suitability of the product for the end consumer should be a particular area of focus.

    Agency responsibilities – The FCA is likely to focus on whether asset managers are acting as good agents, i.e. the extent to which their fiduciary obligations form an integral part of their firms’ business model and their behaviour in the market. 

    The FCA may seek to establish whether firms take proper account of investors’ interests both in how they structure their relationships with third parties and how they design and manage their products.  Possible areas of scrutiny may include (i) dealing commissions, (ii) fund charges, (iii) cross-trading strategies and rationales, (iv) product governance and design, and (v) distribution chains for retail products.  The FCA indicated that it expects to start its thematic review in this area in either Q2 or Q3 2014.

    Market abuse controls – the FCA has placed financial crime at the heart of its regulatory agenda as seen through a number of large fines for AML failings. In 2014, the FCA will focus on trading controls and whether these are designed to prevent improper market behaviour.  This thematic review is planned for Q2 2014.

    Firms will need to monitor any speeches, thematic work, Market Watch publications and enforcement actions in relation to financial crime.  They will also need to carry out regular reviews of their policies, procedures and systems and controls to ensure compliance with key messages and expectations from the FCA.  Firms will need to update their anti-bribery and corruption, AML and sanctions training for staff. 

    For further information on the findings from the FCA’s thematic review of AML and ABC controls in asset management firms, please see our previous briefing on this topic.

    Cross-sector focus

    In addition to the FCA’s specific thematic work, asset managers are also likely to be probed on various areas relevant to all financial institutions.  As part of its continuing work on influencing culture and encouraging ethical market behaviour, the FCA is increasingly looking at firms’ incentives structures and performance management.  For the FCA, these are key drivers for encouraging ethical behaviour.

    The FCA will also, for the first time, focus on firms’ IT systems.  Cybercrime has become a major concern for financial institutions and national governments due to the potential for significant client detriment.  Firms will have to take into account not only FCA rules, but also the provisions of the Network and Information Security Directive due for UK implementation by the Summer of 2016.

    Incentives and performance management – all financial institutions can expect increased scrutiny over their staff incentive schemes and performance reviews.  Firms should pay particular attention to whether their cultural values are properly embedded in any incentive schemes and performance reviews.  For example, a firm may describe its cultural values as placing customers at the heart of its business, however its incentive schemes may reward aggressive sales, with performance and career progression only linked to meeting aggressive sales targets.  The FCA is likely to view this type of misalignment between culture and incentives unkindly because it has the potential to increase the risk for poor customer outcomes and to market integrity.

    Resilience against cyber attacks – all financial institutions can expect the FCA to show a greater interest in their IT systems, legacy systems in particular, with a view to assessing the extent to which they may be vulnerable to cyber attacks.  This area of scrutiny may include a review of firms’ systems and controls for detecting and dealing with financial crime.  Firms should consider adding cyber attacks as a specific risk to be considered as part of annual risk assessments.

    Visibility of IT resilience and risks at board level - linked to the issue of resilience to cyber crime attacks is the FCA’s expectations that such issues will be given due attention by senior management.  The FCA will expect to see cybercrime and IT resilience as topics for discussion at Board level.  The FCA is likely to expect this to be supported by appropriate management information and challenge.  Firms should ensure that where such debate takes place it is properly documented.

    The “new order” – what next?

    Firms will need to consider the current Business Plan, and Business Plans for years to come, in view of the FCA’s principles for supervision.  These indicate that the FCA will become a forward-looking and pre-emptive regulator, focused on the big issues which are likely to cause the biggest problems.  The FCA has stated that it will seek to ensure that firms act in the right spirit in order to achieve fair outcomes for consumers and markets.  Where issues arise, or are likely to arise, the FCA is likely to respond robustly with a judgment-based decision on compliance with the spirit and not just the letter of the law.  The FCA is likely to seek to engage in an open dialogue with firms in order to gain a deeper understanding of their business models and culture, with senior management held accountable for any breaches of the rules and principles.  Lastly, the FCA is likely to seek to pro-actively engage with other regulatory bodies both in the UK and internationally in order to seek to address issues in an increasingly multi-jurisdictional market.

    For more information contact

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