Elizabeth Budd: Change of approach looms for asset managers

Pinsent Masons partner Elizabeth Budd examines the City regulator's plans to overhaul the asset management sector. Picture: Contributed

The UK’s asset management industry is the second largest in the world, with around £6.9 trillion of assets under management. This figure includes more than £1tn managed on behalf of individual UK investors, £3tn in pension funds and other institutional investors and around £2.7tn on behalf of overseas clients.

In an interim report, published in November last year, the FCA made criticisms of asset management firms and others and has now set out a number of remedies.

The regulator has also made a number of recommendations aimed at investment consultants, who provide advice to pension funds and other institutional investors. These include the market study into investment platforms trailed by the FCA in its 2017/18 business plan, as well as the potential reference of the investment consultancy services market to the Competition & Markets Authority (CMA). It has also recommended that it be given regulatory oversight over these services.

Its proposed remedies, developed in consultation with the industry and investor representatives, include strengthening the duty on fund managers to act in the best interests of investors through the Senior Managers Regime. It is also proposing the introduction of a single, “all-in” fee for investment management services.

The FCA will consult on some of its proposed remedies, which include governance and technical changes, until 28 September. It is also consulting (until 26 July) on its provisional decision to reject the undertakings in lieu of a reference that were offered and refer the investment consultancy services to CMA for a market investigation.

Some of the remedies the FCA proposed do not require consultation, others will require further consultation as a result of the EU’s recast Markets in Financial Instruments Directive (MiFID II), which comes into force on 3 January 2018.

A CMA market investigation takes 18 months, which can be extended by six months. But it must be stressed that if a market investigation was to proceed it would not be an investigation into any individual firms’ potential infringement of competition law; it would rather be market-wide and seek to determine whether competition is working well within a market.

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FCA chief executive Andrew Bailey has said the comprehensive package of reforms would make competition work better and help both retail and institutional investors to make their money work better for them. The report also rightly notes that some of the interim findings are already being addressed by developments at European level, such as MiFID II.

The proposal to extend the Senior Managers and Certification Regime (SM&CR) to investment managers has been in the pipeline for some time.

The requirement to act in the best interests of investors in fact sits in the UCITS Directive, AIFMD and MiFID II and the way in which that concept is to be understood is developing, but there has been a clear move towards making this centre stage.

It is perhaps logical that the FCA would propose this step. However, assessing value for money on a risk-adjusted net return is fraught with uncertainty and it can be expected that investment managers will want a lot more clarity around what this means.

The regulator is expecting to see a change in approach, and demonstrating the proper approach will become much more important. The SM&CR extension will concentrate individuals’ minds on their own areas of responsibility and bring home the personal nature of decision-making.

• Elizabeth Budd is partner and financial services regulatory specialist at legal firm Pinsent Masons

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