UK Asset Manager Review Due in Q2
The Financial Conduct Authority is due to publish its market study of UK asset management in the second quarter of this year and will also focus on liquidity management and technology in the sector.
The FCA published its annual business plan for 2017/18 yesterday setting out its priorities and agenda for the coming year. Sarah Isted, partner at PwC, said on the firm’s Financial Services Risk and Regulation blog that for asset managers the headline item remains the FCA’s market study which is due in the second quarter.
In its interim market study on asset management the FCA found that price competition is weak in a number of areas and that the industry has seen sustained high profits over a number of years. In addition, investors are not always clear what the funds’ objectives are and fund performance is not always reported against an appropriate benchmark. The FCA’s proposed remedies included introducing a strengthened duty on asset managers to act in the best interests of investors and introducing an all-in fee so that investors can clearly see what is being taken from the fund.
Isted said: “The business plan also indicates a number of emerging areas of focus, such as liquidity management. Technology will be a big area of focus for the asset management sector this year too, as the FCA continues to support firms looking to offer innovative products and services such as robo advice.”
Technological change and resilience is one of the regulator’s cross-sector priorities alongside culture and governance, financial crime and anti-money laundering, competition and innovation, treatment of existing customers, and consumer vulnerability.
John Salmon, partner in law firm Hogan Lovells’ financial institutions sector, said in an email that the the business plan recognises that an increasing reliance on technology by both traditional financial institutions and new fintech firms, the quality of the IT infrastructure poses a significant risk.
The FCA said digitalisation and automation can increase cost efficiencies for markets, firms and consumers and improve the delivery of products and services to consumers and counterparties. However, if there is insufficient investment in legacy systems and poorly planned and executed IT change management plans, markets are more susceptible to disruptions, price shocks and successful cyber-attacks.
“The FCA also makes reference to firms needing to make sure they understand what data they collect and how the data is used and also what artificial intelligence and algorithms they use,” said Salmon. “This is clearly really important from the FCA’s point of view but may be challenging for those firms wanting to use machine learning techniques.”
The regulator said smart data, digitalisation and advances in data analytics will allow firms to process large amounts of information, profile clients, undertake risk analytics and build algorithms are shaping market activities, financial products and services. The FCA added that annual global IP traffic is expected to increase nearly threefold over the next five years.
“In wholesale markets, increasing use of big data in business models means firms need to ensure they are using data appropriately and managing it effectively,” said the FCA. “This is especially true where firms, including those that undertake wholesale activities, have multiple different business lines and access to the data needs to be restricted within an organisation.”
Michael Thomas, another partner in Hogan Lovells’ financial institutions sector, said in an email: “Existing firms will have to ensure that their compliance solutions are in step with their IT change management, while new market entrants must make sure they are aware of their obligations under the regulatory system.”
In the banking sector the FCA highlighted a number of long-standing challenges, such as the ability of banks’ systems to defend against cyber attacks and prevent financial crime. Isted said that for wholesale banking, the main message is of a continued commitment to work begun in the last business plan such as implementation of EU policy, a focus on primary markets and corporate and investment banking competition.”
“Given the changes we are seeing in the market, the shifting needs of customers and the impact of Brexit, the FCA could have been a bit more radical,” added Isted. “But the FCA acknowledges that Brexit will require regulatory flexibility, so it could well change its agenda as the post-Brexit regulatory landscape becomes clearer.”
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