What were November’s highlights?
FCA Asset Management Market Study Interim Report Published
On 18 November 2016, the FCA published its long-awaited interim report on the asset management market study which suggests that there is weak price competition in a number of areas of the asset management industry.
In particular, the FCA found that there is limited price competition for actively managed funds, there is stronger competition on price for passively managed funds, fund objectives are not always clear, and performance is not always reported against an appropriate benchmark. The FCA also discovered that, despite a large number of firms operating in the market the asset management sector as a whole has enjoyed sustained, high profits over a number of years with significant price clustering. Also, the study stated that investment consultants undertake valuable due diligence for pension funds but are not effective at identifying outperforming fund managers and there are conflicts of interest in the investment consulting business model which require further scrutiny.
The FCA is now seeking views about its interim findings and welcomes views from all stakeholders on the emerging thinking on potential remedies by 20 February 2017.
For more information see our briefings on the FCA asset management market study: Interim report sees the FCA flexing its competition powers and UK pensions speedbrief: investment consultants in the competition spotlight. Eversheds is also hosting an event “Spotlight on the Asset Management Market Study” on Tuesday, 13 December 2016. See our events page for more information.
ESMA speech on improving outcomes for investors in EU-based investment funds
On 16 November 2016, Steven Maijoor, ESMA Chair, delivered a speech at the European Fund and Asset Management Association’s Investment Management Forum on ways to improve outcomes for investors in EU-based investment funds.
Mr Maijoor states that the European asset management industry and the regulatory frameworks of MiFID and UCITS have clearly brought economic and social benefits to the EU investor but that more can be done to improve the efficiency and transparency of the EU investment fund sector. This belief forms the basis of ESMA’s work to improve transparency and information available to investors, and its contributions to the CMU Action Plan on facilitating cross-border distribution. ESMA also seeks to support innovation in the financial sector, such as automated advice.
In this speech, Mr Maijoor highlighted the following points:
- ESMA believes that improving transparency and the information available to fund investors will help them choose funds that offer value for money in meeting their objectives. The stronger focus on cost disclosure and inducements under MiFID II should lead to more competition among service providers and bring some positive outcomes for investors.
- The Commission has identified asset management as a key activity in the Capital Markets Union (CMU) context. The Commission's CMU action plan includes a specific workstream on identifying, and subsequently removing, unjustified barriers to the cross-border distribution of investment funds and ESMA has contributed to this work.
- ESMA is also contributing to the CMU in relation to the net returns and performance of long-term investment products. It is currently discussing the details of this work with the Commission.
- Many improvements in outcomes for investors will not come from regulation but from innovation in the private sector. FinTech is an area of financial innovation that may bring radical change across the financial sector. As automated advice is increasingly adopted, ESMA sees much potential for this to bring benefits to consumers, including in relation to financial inclusion in the investment fund sector, and a direct reduction in the costs involved in providing advice. However, automated advice also brings risks, which must be managed as part of the process of facilitating greater efficiency among EU-based investment funds.
ESMA also believes there should be a consideration of how different areas of regulation, both European and national, can interact to shape the evolution of technologies such as automated advice. For example, restrictions on inducements may have stimulated the growth of the automated advice market.
Investment Association updates principles on outsourcing by asset managers
On 28 November 2016, the Investment Association published an updated version of its outsourcing working group (OWG) report responding to the FSA's December 2012 “Dear CEO letter” on asset managers' outsourcing arrangements.
The original report was published in December 2013. The updated version includes a new Chapter 7, which contains an addendum to the report. The addendum explains that, in the three years since publication of the report, the asset management industry has considered the OWG's guiding principles and incorporated them within individual oversight programmes.
Oversight, exit planning and standardisation remain the core areas for asset managers to consider. However, oversight is a particular focus for the industry and the FCA. It now has a more general application, with an increased focus on supply-chain dependencies and technology resilience.
The key aim of the addendum is to provide asset managers with further considerations as to how they could gain comfort regarding their oversight obligations for outsourced functions and services. Firms are reminded that, when focusing on their oversight obligations, they may not satisfy the FCA's expectations by solely relying on attestations from service providers without due consideration of the risks, supported by documented rationale.
In the report, the OWG identified four key principles for oversight: know your outsourcing (KYO); risk based assessment (RBA); ownership at a senior level; and governance framework. In particular, the addendum focuses on the second of these principles, which highlights the importance of RBA and contains considerations that could be included in an RBA. This focus is in recognition of the FCA's original intent that asset managers should find practical solutions that are viable, robust and realistic.
The addendum is intended to be read in conjunction with the original report and not used in isolation to address oversight requirements. The OWG advises asset managers to keep on top of developments as the regulatory framework evolves. For instance, they should consider how the planned extension of the senior managers regime (SMR) to the asset management sector will impact on their approaches to oversight.
PRA issues second consultation on implementation of MiFID II
On 25 November 2016, the PRA issued its second consultation paper (CP43/16) on implementation of the MiFID II Directive and the Markets in Financial Instruments Regulation (MiFIR). This consultation paper follows CP9/16 ‘Implementation of MiFID II: Part 1’, which consulted on implementation of the MiFID II passporting regime and algorithmic trading. The final rules following CP9/16 were published in Policy Statement 29/16.
CP43/16 contains proposals relating to:
- Enhancing governance through MiFID II management body requirements and key organisational requirements which will apply to MiFID and non-MiFID business.
- Granting authorisations relating to the new investment activity of operating an organised trading facility (OTF), emissions allowances and structured deposits.
- Consequential amendments.
The consultation closes on 27 February 2017. The proposed implementation date for the proposals in the CP is 1 January 2018.
For more information contact