8.12.2015 LOCAL GOVERNMENT PENSION SCHEME: INVESTMENT REFORM CRITERIA AND GUIDANCE

The Department for Communities and Local Government has published criteria and guidance for administering authorities following the announcement of a Government plan to work alongside the Local Government Pension Scheme (the Scheme) to pool investments.

The criteria and guidance paper follows the announcement in the July 2015 budget that the Government would work alongside  the Scheme to pool the investments of the 89 administering authorities into up to six British Wealth Funds, each with assets of at least £25bn.

The ministerial foreword to the paper states that the creation of the British Wealth Funds will drive down investment costs and enable the authorities to develop capacity to become a world leader in infrastructure investment.

The paper invites administering authorities to provide initial proposals for pooling by 19 February 2016. Proposals will be assessed against four key criteria:

  • Achieving the benefit of scale

Proposals should describe the pools, how they propose to allocate the assets of each administering authority, describe scale benefits of the arrangements and how these will be realised, measured and reported.

  • Governance and decision-making

Achieving local authority assurance of properly managed investments and ensure adequate risk management and a culture of continuous improvement.

  • Reducing costs and achieving value for money

The paper invites administering authorities to be more transparent in reporting hidden costs, in order to identify savings. Proposals should set out how they will achieve savings in the short term as well as over a 15 year timeframe.

  • Improving ability to invest in infrastructure

Pooling of assets seeks to increase the number of administering authorities investing into infrastructure. Proposals should set out how an increased investment in this area can be achieved.

Once initial proposals and refined proposals have been reviewed, the Government intends to publish a brief report in response.

09.12.2015 WEALTH MANAGERS AND PRIVATE BANKS – SUITABILITY OF PORTFOLIOS

The Financial Conduct Authority (FCA) has published Thematic Review 15/12 on wealth management firms and private banks – suitability of investment portfolios.

The review follows earlier thematic reviews of suitability in a sample of wealth management firms, carried out in 2010, which led to the FSA’s Dear CEO letter in June 2011 and was followed by further work in 2012.

The previous thematic work identified the following key issues in many firms:

  • an inability to demonstrate suitability, for example because of absence of up-to-date customer information, inadequate risk profiling, or failure to record customers’ financial position and/or their investment knowledge and experience; and
  • a risk of unsuitability due to inconsistencies between portfolios and the customer’s attitude to risk, investment objectives and/or investment horizon.

In TR 15/12 FCA reports that wealth managers and private banks have made progress in demonstrating the suitability of their clients’ portfolios but some firms need to make substantial improvements in client information practices as well as ensuring the portfolios they manage truly reflect the needs and risk appetite of their customers. The FCA will be following up on these issues with these firms.

The FCA encourages all firms providing discretionary and advisory portfolio management services to retail customers to review the findings set out in TR 15/12, consider whether any of the issues identified apply to their own businesses, and take action where necessary. The FCA has provided some examples of good and poor practices observed in its review.

02.12.2015 FCA SPEECH ON THE SENIOR MANAGERS REGIME

Tracey McDermott, acting Chief Executive of the Financial Conduct Authority (FCA), has delivered a speech on the implementation of the Senior Managers and Certification Regime (SM&CR).

In her speech, McDermott emphasised that the SM&CR aims  to move away from a “narrow focus on what the letter of the law requires” towards an environment in which firms embrace the “spirit” of the rules and thereby ensure better ex-ante decision- making by firms.

She set out a number of points that firms should consider in relation to implementation of the SM&CR:

  • begin by thinking through which of their entities are caught by the new rules and how these entities are linked together;
  • think about the activities and significance of each of these entities;
  • identify the individuals that hold Senior Management Functions and allocate responsibilities, paying attention to any gaps that may exist. Ensure that people with overall responsibility for a whole area or activity in a firm are included on the list; and
  • record the resulting allocation of who is doing what, in the form of short statements for each individual, and an overall map for the firm or group as a whole.

McDermott concluded by stating that it is the industry itself that must drive up standards, rather than relying on government or the regulator to do this. She noted that, while it is unrealistic to prevent all misconduct by individuals, the goal is for front line staff, rather than legal and compliance functions, to be motivated to identify misconduct, with “individuals motivated to do the right thing as a matter of course and consistently.”

04.12.2015 ESAS’ DISCUSSION PAPER ON AUTOMATION IN FINANCIAL ADVICE

The Joint Committee of the three European Supervisory Authorities (ESAs) – the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority – has launched a Discussion Paper on automation in financial advice, aimed at assessing what, if any, action is required to harness its potential benefits and mitigate its risks.

The ESAs note that, with the increasing digitalisation of financial services, a growing number of financial institutions are offering automated tools when providing advice or recommendations to consumers, often referred to as robo-advisors. These could potentially change the way consumers and financial institutions interact when buying or selling financial products.

The paper explains the concept of automation in financial advice, where a financial institution provides advice or recommendations to consumers without human intervention (or with very little), and relies instead on computer-based algorithms and/or decision trees. The paper highlights potential benefits and risks associated with this development.

The potential benefits which the ESAs have identified include lower costs, higher consistency of advice and a larger number of customers that can be reached. The potential risks include the inability of consumers to talk to a human advisor who can guide them through the process and provide clarifications, and vulnerability to various types of IT failure.

The deadline for the submission of comments is 4 March 2016.

02.12.2015 ESMA UPDATES Q&A ON APPLICATION OF AIFMD

The European Securities and Markets Authority (ESMA) has published an updated version  of its Q&A paper on the application of the Alternative Investment Fund Managers Directive (2011/61/EU) (AIFMD) (ESMA/2015/1786).

The paper includes new Q&As on reporting, which are highlighted in yellow in the paper.

The intention of the Q&A is to promote common supervisory approaches and practices in the application of the AIFMD and its implementing measures. Responses are provided to questions posed by the general public and competent authorities in relation to the practical application of the AIFMD. The answers are also intended to help Alternative Investment Fund Managers by providing clarity on the content of the AIFMD rules.