FCA: Improving the way the UK Asset Management regime works

Building on our initial summary of the Financial Conduct Authority’s (“FCA”) discussion paper on “Updating and Enhancing the UK Asset Management Regime” (DP23/2), which focuses on improving investor engagement through technology, set out below is a second summary that highlights improving the regime’s functionality. The aim of the suggested changes put forth by the FCA is to ensure that the asset management system delivers good outcomes for retail and professional investors.

The FCA proposes improvements to the following areas:

Rules for authorised fund managers (“AFM”):

The FCA is introducing new guidance that outlines the responsibilities of host AFMs. Certain functions may require a deeper understanding of the assets in the fund to be carried out to an acceptable standard, in order to protect the consumer. To achieve this, the FCA recommends creating specific contractual requirements between the AFM and the portfolio manager, reducing the risk of misunderstandings regarding the AFM’s obligations by the portfolio manager. Additionally, a trade body or other group may provide support in developing industry guidance to establish appropriate standards and act as a guide for host AFMs. Finally, the FCA emphasises the importance of clarifying the responsibilities of a portfolio manager to ensure that the fund operates in the best interests of investors.

Enhancing liquidity management:

The FCA is proposing that fund managers carry out effective liquidity risk management. These measures include compliance with liquidity stress testing guidelines issued by the European Securities and Markets Authority (“ESMA”). The FCA is also considering removing or significantly restricting the limitations surrounding liquidity stress testing in the collective investment schemes sourcebook (COLL 6.12.11R(2)), so that the qualification ‘where appropriate’ does not give fund managers a reason not to carry out stress tests. Additionally, the FCA is exploring ways to clarify the rules surrounding dilution adjustments and anti-dilution mechanisms. To ensure appropriate regulatory oversight, the FCA currently receive reporting on liquidity categories (or ‘buckets’) for alternative investment funds; the FCA could potentially extend this to undertakings for collective investment in transferrable securities (“UCITS”) funds.

Investment due diligence:

The FCA states that there is inconsistency in the practice of investment due diligence, and some illiquid or complex securities have been invested in without proper examination. The FCA is considering whether it would be best to establish regulatory expectations for investment due diligence across all asset management activities. The FCA does not intend to impose complicated or onerous restrictions, however, believes that having clearer standards would be advantageous.

Clarifying rules for depositaries:

The FCA recognises that some of their rules may require depositaries to perform oversight functions that may not offer significant benefits. Therefore, the FCA is seeking to identify such rules and remove them if necessary. The FCA is providing clarification on various rules, including the systems and controls that a depositary must have in place to identify breaches of the rules and constituting documents of a scheme. The FCA is also defining the resources, knowledge, skills, and experience that would be expected of a depositary. The FCA is specifying the actions expected to be taken in the event of a breach, and what the depositary should do if the manager does not respond appropriately. Lastly, the FCA is outlining the depositaries’ oversight of the AFM’s liquidity management, as well as its pricing and dealing in fund units.

We’ll be exploring two more of the proposals in the FCA’s discussion paper over the coming weeks, look out for our summaries covering:

  1. Measures to promote competition and innovation in the industry.
  2. How FCA rules could be improved.

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