18.11.2016 - FCA Asset Management Market Study Interim Report

The FCA has published the interim findings of its asset management market study (MS15/2.2). The findings suggest that there is weak price competition in a number of areas of the asset management industry.

The FCA launched the market study in November 2015 to assess whether competition is working effectively. It looked at whether institutional and retail investors get good value for money when purchasing asset management services.

The FCA has found that:

  • there is limited price competition for actively managed funds, meaning that investors often pay high charges. On average, these costs are not justified by higher returns;
  • there is stronger competition on price for passively managed funds, though the FCA did find some examples of poor value for money in this segment;
  • fund objectives are not always clear, and performance is not always reported against an appropriate benchmark;
  • 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; and
  • investment consultants undertake valuable due diligence for pension funds but are not effective at identifying outperforming fund managers. There are also conflicts of interest in the investment consulting business model which require further scrutiny.

The FCA proposes a package of measures that seeks to make competition work better in this market, and protect those least able to engage actively with their asset manager. These include:

  • a strengthened duty on asset managers to act in the best interests of investors, including reforms to hold asset managers to account for how they deliver value for money;
  • introducing an all-in fee so that investors in funds can easily see what is being taken from the fund;
  • a number of measures aimed at helping retail investors identify which fund is right for them, such as requiring asset managers to be clear about the objectives of the fund, clarifying and strengthening the use of benchmarks and providing tools for investors to identify persistent underperformance;
  • making it easier for retail investors to move into better value share classes;
  • requiring clearer communication of fund charges and their impact at the point of sale and in ongoing communication to retail investors;
  • requiring increased transparency and standardisation of costs and charges information for institutional investors;
  • exploring the potential benefits of greater pooling of pension scheme assets; and
  • requiring greater and clearer disclosure of fiduciary management fees and performance.

The FCA is also consulting on whether to make a market investigation reference to the Competition and Markets Authority on the investment consultancy market. The FCA has also recommended that HM Treasury considers bringing the provision of institutional investment advice within the FCA's regulatory perimeter.

In addition, the FCA will undertake further competition work on the retail distribution of funds, particularly in relation to the impact financial advisers and platforms have on value for money.

The FCA asks for comments by 20 February 2017. FCA's final report is scheduled for the second quarter of 2017.

16.11.2016 - ESMA on improving outcomes for investors in EU-based investment funds

The European Securities and Markets Authority (ESMA) Chair, Steven Maijoor, spoke at the European Fund and Asset Management Association's (EFAMA) Investment Management Forum on how to improve outcomes for investors in EU-based investment funds. ESMA believes that more can be done to improve the efficiency and transparency of the investment fund sector and is working to improve transparency and the information available to investors. ESMA is also working to remove barriers to cross-border distribution, as well as seeking to support technological innovations in the financial sector.

Maijoor's speech highlighted that ESMA is committed to building on regulatory and technology initiatives to achieve better outcomes for investors. In particular:

  • ESMA believes improving transparency and the information available to investors will help them choose funds that offer them value for money in meeting their goals. MIFID II requires that information about thirdparty payments be provided to clients in the context of information on costs and charges. This would inform clients about how they indirectly pay for the services they receive, and allow clients to understand the total costs of the service provided and to compare between different services and financial instruments. Additionally ESMA believes the stronger focus on cost disclosure and inducements should lead to more competition among service providers and bring some positive outcomes for investors.
  • ESMA is also working towards the removal of unjustified barriers to cross-border distribution of UCITS and finding other economies of scale through the Capital Markets Union (CMU). These barriers include discriminatory tax treatment, varying national requirements on the marketing of funds and fees for cross-border notifications.

ESMA believes that improvements in outcomes for investors will come from financial innovation in relation to technology. ESMA believes that "Fintech" is an area of financial innovation that has much potential to bring benefit to consumers, including financial inclusion in the investment fund sector and a direct reduction in costs involved in providing advice. That said, ESMA recognises the need to monitor the risks of using automated processes, as part of facilitating greater efficiency among EU-based investment funds.

16.11.2016 - ESMA publishes revised AIFMD Q&A

The European Securities and Markets Authority (ESMA) has published a revised version of its AIFMD Q&A.

The AIFMD Q&A has been updated to include the following new Q&As:

Notification of AIFs

  • ESMA has clarified that, in relation to AIFs marketed in a host Member State by way of the AIFMD passport, the creation of a share class does not constitute a material change of the notification.
  • Any material changes to existing notifications must be accompanied by a full set of documentation (as required by Articles 32 or 33) and AIFMs are required to highlight any amendments to the original notification letter and accompanying documentation.


  • Where a third party performs the functions stated in Annex I of AIFMD, this should be considered to have been delegated to the third party by the AIFM and so the AIFMD would be responsible for ensuring compliance with the requirements of delegation in Article 20 of the AIFMD.
  • Where an AIF appoints an externally-managed AIFM, the externally-managed AIFM is responsible for providing the functions stated in Annex I of the AIFMD. These may be delegated to third parties in accordance with Article 20 of the AIFMD. The AIF itself is, however, not a third party and may not perform the functions set out in Annex I.

10.11.2016 - ESMA updates MAR guidelines on market soundings

ESMA has re-issued its final guidelines in relation to the implementation of the Market Abuse Regulation (MAR) for persons receiving market soundings. A market sounding is where an institution contacts potential investors to assess their interest in a possible transaction or issue.

The new MAR extends the existing market abuse regime into new markets, platforms and trading behaviours, as well as containing prohibitions on insider dealing and market manipulation

The re-publication moves the legal application date of the guidelines to 10 January 2017 and also marks the start of the two month period within which a national competent authority which is subject to the guidelines may notify ESMA whether they intend to comply.

09.11.2016 - One year delay in the application of the PRIIPs Regulation

The European Commission has proposed a one-year extension to the application of the Regulation on Key Information Documents for Packaged Retail and Insurance-based Investment Products (PRIIPs) following the rejection of the draft Regulatory Technical Standards (RTS) and Draft RTS Annexes by the European Parliament on 14 September 2016.

The Commission has stated that the year extension is in the interest of ensuring a smooth implementation for European consumers and to ensure legal certainty for the sector. The delay is considered to provide issuers and distributors of PRIIPs sufficient time to prepare for the application of the new rules.

The Commission considers that targeted revisions to the RTS provisions on multi-option PRIIPs, performance scenarios, comprehension alert and presentation of insurance related costs, are required to address the concerns expressed by the European Parliament. The Commission has invited the three European Supervisory Authorities (ESMA, EBA and EIOPA) to resubmit the revised RTS to the Commission within six weeks, and to develop guidance in line with the relevant provisions of the RTS on the practical application of credit risk mitigation factors for insurers. The revised RTS will be adopted by the Commission and then subjected to the scrutiny of the European Parliament and Council. It is expected that the revised PRIIPs framework will be introduced in early 2017 and apply as of 1 January 2018.

04.11.2016 - EBA seeks views on new prudential regime for investment firms

The European Banking Authority (EBA) has launched a discussion paper in response to the European Commission's call for technical advice on the design of a new prudential regime for investment firms, which is specifically tailored to the needs of investment firms' different business models and inherent risks.

The call for advice is based on the EBA Report on Investment Firms of December 2015 where the EBA provided its assessment of the current prudential requirements and proposed the following three recommendations:

  • the necessity to make a distinction between investment firms for which prudential requirements equivalent to the ones for credit institutions are applicable and those for which those requirements are not appropriate;
  • a specific prudential regime for credit institutions; and
  • the extension of the exemption for commodity dealers.

The discussion paper focuses on MiFID investment firms that are not deemed to be systemic and bank-like. But the paper also relevant to UCITS management companies or AIF managers, authorised to conduct certain MiFID investment services or activities.

The prudential regime for investment firms which is being proposed will focus is on risks which firms pose to customers and markets and to the firms themselves. Firms that pose more risk to customers and markets should get higher capital requirements than those who pose less risk, and firms that pose similar risk to customers and markets but with more "own" risk should hold more capital than those with less own risk.

The discussion paper covers the most important aspects related to the new prudential requirements for investment firms, including three possible options to set minimum liquidity requirements. All three options aim at addressing the liquidity profile of investment firms in a more appropriate way than the liquidity coverage ratio and the net stable funding ratio.

Other issues discussed in the paper include:

  • the need for consolidated supervision;
  • the opportunity to monitor large exposures for investment firms;
  • the consequences a new prudential regime would have on reporting requirements;
  • the importance of internal risk management arrangements; and
  • the need for competent authority to have the power to address firm specific issues.

The discussion paper remains open to all alternative suggestions as the main focus is to gather as much information as possible from industry stakeholders. Comments on the consultation must be sent to the EBA by 2 February 2017.

14.11.2016 - Money Market Funds: Presidency and EP reach agreement

The Council of the EU has issued a press release stating that the presidency had reached a provisional agreement with representatives of the European Parliament on a draft regulation on money market funds (MMFs) aimed at making such products more robust.

The draft regulation intends to ensure the smooth operation of the short-term funding market while maintaining the role that MMFs play in financing the real economy. This is in line with the efforts made by the G20 and the Financial Stability Board to strengthen the oversight and regulation of the `shadow banking' system.

MMFs are normally used to invest excess cash within short timeframes. As such they give investors an opportunity to diversify their excess cash holdings, whilst maintaining a high level of liquidity.

When markets are stressed MMFs can be vulnerable to shocks and may even amplify risks throughout the financial system, which can fuel an investor `run' and a liquidity crisis for an MMF. The draft regulation sets out rules on the composition of an MMFs portfolio and the valuation of its assets in order to ensure stability of their structure and to guarantee that they invest in well-diversified assets of the highest credit quality.

Common standards are also introduced to increase the liquidity of MMFs and to ensure that they can face sudden redemption requests when market conditions are stressed.

The agreement has only been reached at a political level and a number of technical issues need to be finalised. The agreement will then be submitted to the Permanent Representatives Committee for endorsement on behalf of the Council. The Parliament and the Council will then be called on to adopt the regulation at first reading.

14.11.2016 - FRC statement on Stewardship Code

The Financial Reporting Council (FRC) has released a statement saying that asset managers, asset owners and service providers are showing increased commitment to the Stewardship Code, based on latest analysis of the quality of statements published by signatories.

The FRC has tiered the signatories to the code according to the quality of reporting in their statements, with asset managers categorised into three tiers and other signatories into two tiers. Grade 1 signatories (roughly 120 out of the total 300) have increased by about 40 since the beginning of the tiering exercise.

According to the explanation released by the FRC, tier 1 signatories provide good quality and transparent descriptions of their approach to stewardship, whilst those in tier 3 need to make significant improvements, often providing generic or poorly explained statements.

Stephen Haddrill, CEO, FRC said: "Reporting against the Stewardship Code is not a box-ticking exercise and signatories were encouraged to provide a clear description of their approach to stewardship, with explanations for non-compliance where appropriate.

We will be looking for continuous improvement from code signatories, but we are pleased with the response to this exercise and many signatories have reaffirmed their commitment to quality, transparent reporting and to stewardship."

The Stewardship Code aims to enhance the quality of engagement between investors and companies to help improve long-term risk adjusted returns to shareholders.