03.27.2015
By Terry Flanagan

FCA Set to Step Up Fund Supervision

The first big thematic review undertaken by the Financial Conduct Authority’s new fund supervision team is likely to focus on whether funds deliver what they promise to investors according to PwC.

This week the FCA published its combined risk outlook and business plan for the coming year. Amanda Rowland wrote on PwC’s blog about what this is likely to mean for asset managers.

PwC said: “The FCA confirms its previously announced market study into the asset management industry. Its focus remains on costs and fees paid by investors, continuing a long-running FCA review of asset managers that started with Martin Wheatley’s keynote speech at the 2012 FSA asset management conference.”

Rowland said a new topic was that the FCA will undertake a post-authorisation fund review later this year, which could include whether funds are being sold to the right investors, or reviewing funds that seek to deliver a specific target or absolute return.

“Again details are scarce but we’d expect the FCA to focus on whether funds deliver what they promise to investors,” she added. “This will likely be the first big thematic review undertaken by the FCA’s new fund supervision team.”

The FCA is also focused on ongoing pension reform, pension fee caps and sales of pension products. PwC said: “We expect asset managers to have a busy year ahead, focusing on the above alongside business as usual activities and implementing big regulatory change projects, such as MiFID II.”

Yesterday the Financial Conduct Authority released a paper asking firms, trade bodies and consumer groups on the implementation of certain aspects of the revised Markets in Financial Instruments Directive in the UK.

David Geale, director of policy at the FCA, said in a statement: “We have policy choices to make on some areas of how the Directive applies in the UK, but not in all, and this paper sets out what those are. In those areas where we can be flexible in our approach, we want firms, large and small, to have an opportunity to give us their early views on the changes we are considering.”

The discussion paper excludes the topic of how fund managers should pay for research as the FCA has already generated controversy by saying that it does not believe that commission sharing arrangements can continue to be used under the MiFID II proposals.

Topics in the FCA paper include whether the FCA should ban third party rebating for discretionary investment management firms; options for the assessment of local authorities requesting to be treated as professional clients; whether and how the FCA might apply sales-staff remuneration rules to firms not covered by MiFID II, in light of domestic and European policy developments and the disclosurte requirements on costs and charges.

The paper also details the FCA’s expectations of the likely restrictions on products that can be classified as non-complex and the practical application of the appropriateness test to a wider range of complex products.

Responses are due by 26 May 2015 before the European Commission is likely to publish the MiFID II implementing measures.

The FCA said it will confirm final rules by July 2016, by which time EU Member States must have transposed MiFID II into national laws and regulations for the rules to take effect on 3 January 2017.

The UK Treasury also released a discussion paper on MiFID II with responses due by 18 June 2015.

The Treasury said the UK legislation will as closely as possible mirror the original wording of a directive and go no further than the requirements of MiFID II, except where there is a clear justification and authority to do otherwise and that it will provide draft UK secondary legislation as early as possible to provide opportunities for review and comment.

Steven Maijoor, chair of the European Securities and Markets Authority, told the European Parliament this week that MiFID II is the most significant piece of Level 2 regulation that ESMA has undertaken since its establishment.

He said: “The rules will be final only towards the start of 2016, and there will be just one year to put in place IT systems, procedures, templates, databases, formats, and reporting. Although significant resources are being used both in the public and the private sector, it will be a very significant challenge to have all the systems implemented and running by January 3rd of 2017.”

MiFID II introduces a new transparency framework for non-equity instruments and Esma is trying to obtain and analyse the data needed to set appropriate liquidity and transparency thresholds, especially for corporate bonds.

“Since transparency is linked to the notion of liquidity, which is not prevalent in European bond markets, the number of bonds that will be transparent is very small: less than 10%. Esma proposed a classification of liquidity based on a “class of bonds” concept, built around issuance size,” added Maijoor. “We are aware of the limitations this entails and the concerns it raises both in the sell- and the buy-side and we are in the process of assessing which changes would be needed.”

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