News

May6

Remember the world outside?

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If you ever thought that Brexit had become an over-discussed issue, that must have been several months ago. It is a topic that is destined to succeed in fighting its way out of the shadows that have over-cast it. Whether you regard the intervening months as light relief depends on your point of view. For some, of course, this is a truly tragic time; for rather more it is a time of considerable frustration, seeing good businesses damaged by events well beyond local control. Getting back to Brexit looks positively appealing.

 

With that in mind, many people will have fallen on the FCA’s Business Plan with excitement, having hunted high and low for a diverting read. We well understand your disappointment only to find that all the promised regulatory entertainment is heavily qualified and subject to FCA finding the time to do a little bit of BAU.

 

So we forecast that recent events will be a hook on which the regulator hangs its oven-ready strategic shift away from techy discussions on nice points of regulation to bigger issues more likely to gratify the press, the politicians and even the public. It may seem curious to forecast a shift without knowing who will lead the charge, but there we may see this shift determine the selection of leader. Having been of the view that only an internal candidate would accept the poisoned chalice, we now think it may be that FCA gets a much more political leadership, focused on taking UK regulation through Brexit into a very different place.

 

Meanwhile, there is work to be done. The first priority is to keep the team healthy. The next is to be certain that clients are not damaged by disruption. The third is to ensure that the areas that FCA has raised since the beginning of the year, variously but pretty consistently, in its January Dear CEO letters, in its Sector Views and now in its Business Plan, are thoroughly reviewed and well under control. Busy and distracted as they may be, we expect they will try hard to be seen to follow-up wherever possible.

 

We wish everyone a safe, if unadventurous, summer.

 

 

 

 

 

Posted in: Brexit, FCA, Miscellaneous
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Mar3

The City Needs More Ambition

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Where is the City’s ambition? Some consider the City to be the home of ravenous ambition, both individual and corporate. That might be true, but it is not the question of the hour; that question relates to the City as a financial centre, as a financial jurisdiction and as a hugely important part of the nation’s economy. What does the City want in the new life, post Brexit, that this country has chosen?

Sometimes you just feel like saying “why bother to ask?” You know that what you will get is a torrent of grief about the damage that Brexit will do to the country, how the City should be at the heart of Europe, how important passporting is and how the EU is going to take us to the cleaners. But that is the last war; we need to look at the way that we are going to use the opportunity, a rare opportunity, to shape our financial regime for the future. That would be so much better than spending the year bemoaning the past.

Citizens are broadly aware that prophets of economic doom have turned out to be quite wrong and that the UK has been the best performing European economy.  Since 2016 thousands of British SMEs have abandoned EU markets but have been winning far more lucrative export contract all around the world.  The key high growth markets for our exports are North America, the Middle East and South Asia.  Exports to Taiwan have grown 40% in the last year.

Nevertheless, the gloom and doom factory is hard at work. Many of the loudest voices, including a number of media organisations, have adopted a strategy, or is it just a habit, of speaking only of privileges lost, contrasting a dark future with a wonderous past, and doing so entirely in the context of doing business with EU clients, as if there were none other. There is also a striking tendency to focus on ways that the EU can damage the City, saving EU negotiators lots of hard work, while ignoring ways in which we can discourage damaging measures, how we can take advantage of the EU’s liking for self-inflicted wounds and how we can maximise the value of financial services delivered to the wider world.

It is a strange thing to see City elders publicly fingering those issues that they hold most dear. The City is supposed to be full of dealers, traders and negotiators. They, of all people, should be alert to the obvious: the more you say you want something, the more the price goes up. Keep on banging on about ‘delegation’ and guess what. “Yes, my friend, you can keep delegation but you must let us have your fish, your marbles and your freedom to …………” You know the story. More effective, perhaps, to talk up ways that the UK can take advantage of any such daft restriction, while repeatedly pointing out what damage will be done to EU-domiciled investment funds if they lose their freedom to choose who manages their assets.  Or we can just to ask where, in the pecking order of EU considerations, features the consumer. Little wonder that the Brussels mob have spawned a raft of populist parties who show they do care about the poor bloody voter.

And there is another strange sight too: how passport-carrying financial directives have moved from being enemies of the industry and the people alike to hot competition for the Seven Wonders. Something of a case study, really. AIFMD springs to mind. Hands up all those who supported it when it was introduced. Bet you didn’t. So, why now so popular? Isn’t it because, since the referendum, it is fashionable to speak highly of the EU? Well, at least partly? But maybe it is also because of the EU’s self-fulfilment. Ever since bringing in AIFMD, in the teeth of opposition, the Commission, with a little help from its friends, has sought to eliminate other means of cross-border business, the very concept that they claim to prize.

So, what is it to be? What does the City want, trying to be realistic and, yes, starting from here? Some would say that dynamic alignment would do nicely. Others might observe that that provides no advantage in global markets and that EU regulation made by 27 nations, most of whom have no discernible financial services industry, might, just might, not be that considerate to a sector that many so dislike. Those of a more competitive spirit might note the opportunities for carefully crafted regulation that works against the interests of the City, entirely fortuitously, you understand.

The alternative, so widely known as divergence, which might arise from our own initiative but also, potentially, through our inactivity while the EU diverges, offers scope. Anyway, that is the way we are going and the City would do well to learn to like it. Yes, there may be a price to pay for diverging – the possible loss of any equivalence generously granted – but let’s measure the pros and cons when we get there, never forgetting that equivalence may have a short shelf-life in any event. Who will tell us what divergence might bring? Whose will be the voice that rattles the EU into trying to buy us off? Then let’s measure the pros and cons and see whether they are paying enough for our forbearance – that would be a change. What might it be? Investment funds that are safer and more liquid? Banking that is the best capitalised in the world? Insurance that is recognised as the best value? Properly regulated lending? Mortgages that truly cross national borders? Improvements to EIS, making it much less demanding for SMEs seeking risk finance? And are the regulators themselves the best we can devise? Answers on a postcard, and a loud one at that.

 

So, before we cast aside all such opportunities, let’s not forget that the EU itself, while expressing concern that a fully independent UK might plunge into de-regulation, is now looking at dropping recently introduced measures, strikingly including the ban on various inducements. We may not be able to prevent them from racing to the bottom, but there is no need for us to forego our place at the top.

 

Howard Flight and Oliver Lodge

March 2020

 

Lord Flight was a Conservative Member of Parliament 1997-2005 and a Shadow Treasury Minister 1999-2004.

Oliver Lodge is a regulatory consultant and an elected Member of the City of London Corporation

This article was originally published in The Daily Telegraph on 2nd March 2020

Posted in: Brexit, EU
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Feb20

FCA Reviews

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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

https://www.fca.org.uk/publication/correspondence/asset-management-portfolio-letter.pdf

 

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

https://www.fca.org.uk/publication/correspondence/portfolio-letter-alternatives.pdf

 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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