King Bailey’s Gambit
Given the weight of expectation ahead of the FCA’s final Asset Management Market Study (AMMS) report, there was a tangible sense of disappointment that it did not go far enough from the more fervent reformist quarters. The interim report had promised a number of fairly radical remedies, many of which seemed to be watered down in the final version.
There are a number of reasons why we should not be overly surprised by this. Asset managers do seem to have got their lobbying act a bit more together and perhaps also a sense that, being pegged back on so many fronts by the severity of the initial report, fund groups had ceded a little ground.
The biggest factor, however, is Europe. Although the FCA has stressed that it wasn’t pulling its punches as a sop to a costly Brexit, it has acknowledged that this argument was presented to it countless times during the consultation. But with MiFID II on the horizon, why further disadvantage the UK fund sector by hampering it with uncompetitive and onerous requirements? The UK has long been seen in the EU as a benchmark for regulation, but once we are out there can be no guarantee that this will continue.
Hence, pushing a number of remedies – especially the problematic all-in pricing – into the MiFID II framework seems quite a useful compromise.
Equally, by utilising the existing Senior Managers and Certification Regime (SMCR) to enforce the FCA’s new governance requirements also seems like quite an interesting, joined up approach. The SMCR is clearly a very important framework for the regulator. Shorn of its ability to regulate ‘culture’, the SMCR is the FCA’s tool to ensure that individual and corporate behaviour meets its standards. The performance of group and fund boards has long been a concern of the regulator, and this is clearly going to be an area that remains under close scrutiny.
Moreover, the need to always act in the best interests of the investor will become the definitive guiding principle for Directors, subordinating the duty to act to maximise shareholder profits. Doubtless, this will lead to conflicts, and it will be very instructive how both industry and regulator contend with these.
It has been suggested that the FCA might have decided to refer the industry to the CMA, but the regulator has clarified that point by saying that there is nothing that it cannot do that the CMA can. This is not the case for Investment Consultants, who are less regulated and whose fate seems sealed.
The FCA will now consult on its remedies, as it is required, and we will learn more in September. The regulator will also continue to pursue its other angles – including platforms, product design and global custodians. Private equity and hedge funds will also come under greater scrutiny, and not just in how they disclose fees to institutional investors. Insurance linked funds may also come under review – perhaps the surprise is that it is taking the FCA so long to get to them.
For asset managers, the lessons are simple. Always act in the best interests of the investor, and make it as clear as you can that this is what you are doing. Listening to the FCA after the publication of the final report echoed a presentation given prior to the unveiling of the terms of reference – asset managers need to be more forward-looking. Not in terms of guessing the markets, but in terms of better protecting their clients from foreseeable risks.
This is not to suggest that all fund managers are equally deficient. The industry represents a broad church of approaches, some of whom are more forward-thinking than others. We tend not to hear about them so often, however, one of the reasons why the Transparency Task Force, a lobby group, has set up its Progressive Asset Management group (PAM) to support and promote those asset managers large and small who are leading change within the industry. New members are always welcome.
In reality, there is little ‘final’ about the final report. Such is the nature of modern financial regulation. The battle is neither won nor lost. This is by no means the end. History will look back at this and see it as no more than the opening moves in a very cagey game of chess.
This article is part of our Summer 2017 newsletter.