What’s happening at the FCA

In January, the FCA have published a series of letters making it clear where its focus will be in a new “post Brexit” decade. The timing is important as the FCA is not only facing change as we decouple from European supervision but facing the challenge of changing CEO. We now know that Chris Woollard will be interim CEO following the imminent departure of Andrew Bailey, we do not know if that appointment will be permanent but Chris represents continuity with the past and as head of the Competition and Markets division has had influence over almost all aspects of the FCA. His appointment has been greeted well.

There have been three Dear CEO letters,

1. To the general insurance market; this is a reminder about the risks of bad conduct and seems aimed at the culture in general insurance firms. From my experience this has a lot to do with alcohol and the old school tie.
2. To financial advisers; this is the strongest statement yet on behaviour around DB transfers. The FCA seems to have worked out that going forward, PI insurers will do its dirty work for them, the question is about the past. Many advisory firms face an uncertain future over advice given on transfers and this letter will be giving them little comfort.
3. To asset managers ; this blog has noted that the asset management industry has got away quite lightly following the damning 2017 Asset Management Market Review. This third letter makes it clear that the FCA is still on the case and lists a number of areas in which asset managers are failing.

I suspect that these letters are designed to be read not just by authorised firms , but by European Regulators keen that Britain does not decouple too far and allow Britain to become a regulatory back-door for poor practice,

I’m pleased to read these letters , they are strongly worded but even in tone. They are timely and are clearly being read.

Taking on vested interests

I was particularly pleased to read the Asset Management Portfolio Letter

Asset Managers have privately considered themselves too important to the UK economy to be much concerned with regulators, let alone local regulators. This letter talks about key risks of harm that Asset Managers pose to their customers or the markets in which they operate.

Harm comes as a result of failings in five areas

1. Overall standards of governance, particularly at the level of the regulated entity, generally fall below our expectations.
2. Funds offered to retail investors in the UK do not consistently deliver good value
3. Asset Managers fail  to identify and manage conflicts of interest.
4. They have made inadequate investment in technology
5. (Lack of) operational resilience has led to deficient systems which could cause harm to market integrity or loss of sensitive data.

And this is just for starters.

Moving on to specifics, the FCA (clearly with Woodford in mind focus on failings in liquidity management.

They find weaknesses in the implementation of new governance structures and point to the Senior Managers Certification Regime (SMCR) as a way of delivering high standards of governance (not a compliance tick-box exercise);

They are demanding that these governance structures complete value assessments on the funds they oversee to weed out funds which charge for what they are not giving (closet trackers)

They are looking at the role of Authorised Corporate Directors (ACDs) ,such as Link (which oversaw Woodford) and Gallium (which has overseen entities like the Vega algorithm and Strand Capital (well known to British Steel transferees). It is especially interested in the conflicts of interest that arise when an ACD

“cannot oversee the fund properly because, for example, it is concerned to avoid a loss of revenue from the investment manager if it were to offer more assertive challenge”

The letter also tells asset managers to get on with transitioning away from Libor benchmarks and to invest in the systems that allow proper reporting on items such as MIFID II. We hope that the 2020 IGC reports will not contain another round of remonstrances concerning the non-availability of data from fund managers on what funds were actually costing saving money into them.

Put together , this is as powerful statement of intent as we have seen since the publication of the AMMR and this bodes well for greater transparency in future.

It has to be noted however that there is little in this letter that wasn’t in the AMMR and we are over two years on. Now is the time to name and shame the managers that are doing harm to the public and doing harm to asset management.

Why we should be behind this strong approach

There is a very real fear that as we leave Europe, the FCA drops its gloves and allows the consumer to get it between the eyes. Britain cannot become an offshore back-door to bad practice. There are plenty of asset managers who see “regulatory arbitrage” as part of their business model and we cannot become a “soft touch”.

The shift towards greater transparency is all about data management. If asset managers feel they can continue to play tiny violins over Mifid II reporting , then not only will they hold up the work of trustees and IGCs in protecting consumers, they will give a cue to those managing pension funds to join the string section.

The pensions dashboard is a prime example of a consumer driven project which is being held up because of lack of investment in systems. Harm is happening and third party administrators and in-house admin teams should not be able to point to deficiencies elsewhere as precedent for their own failing.

The average margin of asset managers was stated as 36% by the FCA in its AMMR, there is ample money in the asset management industry to pay for an overhaul of systems to deliver. Where asset managers lead, we hope others will follow. We live in an era of open banking, we want open finance and the FCA can demand the asset management gets on with it.

2019 was a year of scandal for retail asset managers. Woodford showed how easy it could be for a “name” manager to run a multi-billion pound asset management business without proper regard to solvency, the ACD was hopeless as have been other retail ACDs. These failures suggest failings in independent governance in these funds and deficiencies among platforms in understanding what they were offering (indeed promoting) to retail customers.

The FCA’s approach is impressive but…

Taken together , these three letters are impressive. But they depend , to be effective on the FCA enforcing the remedies in its many initiatives.

These cannot be enforced in isolation, they need a willingness on the part of general insurance, financial advisers and asset managers to want to comply and to whistle-blow on bad behaviour.

The FCA must work with the good to eliminate the bad and encourage those who are doing good things by holding them up as an example.

Sticks work,  carrots work too!