On 17 April 2019, the FCA released its business plan for 2019/20 covering some of the following cross-sector priorities:
- EU withdrawal and international engagements;
- firms’ culture and governance;
- operational resilience;
- financial crime & AML; and
- innovation and data ethics.
Furthermore, their business plan also focuses on a number of sector specific priorities, including those of the investment management sector.
EU WITHDRAWAL AND INTERNATIONAL ENGAGEMENTS
The key aims for the FCA will be to continue providing the government with technical advice and support regarding the upcoming equivalence assessments. And as a result of becoming a third country in relation to the EU post-exit, the FCA will be focusing on building strong bilateral relationships with key regulatory authorities and international bodies to ensure the global regulatory agenda includes UK input.
FIRMS’ CULTURE AND GOVERNANCE
Aside from the implementation of Senior Managers and Certification Regime (“SMCR”), the effects of which have been discussed in our previous articles (to view please click here and here), the FCA is looking to explore more practically, the role of “purpose” in creating a healthy culture. The FCA will look more thoroughly at the concept of ‘purpose’ in financial services and how to create a purposeful culture.
To encourage positive culture transformation within the financial services industry, the FCA will be facilitating roundtables, webinars and events to gather views on leadership and management capabilities, remuneration and incentives, and firms’ assessment of culture. The aim of running these sessions will be to understand what a healthy culture means, what it looks like, what the benefits are and the proactive steps firms’ can take to improve their organisations’ culture. In March 2020, the FCA will hold a conference to share and discuss the outcomes of this work.
The FCA is looking to develop policy proposals with the PRA/Bank of England and consult later with them in 2019. The aim of these consultations will be to help firms manage any reduction in their ability to deliver services and the resulting damage that can cause both as a result from: (1) consumers and markets being unable to access financial services; and (2) data loss damaging confidence in markets.
Another measure to improve operational resilience will be to mitigate the risks that were highlighted through questioners and surveys completed in 2017-2018 whereby the second highest root cause of disruption to services as reported to the FCA were caused by IT failures from third-party suppliers. The view the FCA has taken is that firms may outsource critical services to third parties but it is still ultimately their responsibility to manage the third parties. As a result, the FCA are going to work on better understanding the current outsourcing environment to identify the sectors and business services which are highly dependent on outsourcing arrangements, to produce a report setting out current approaches, causes of the problems, and making their expectations clearer in relation to oversight of third party providers.
FINANCIAL CRIME & AML
One of the essential aims of the FCA is to stop the UK financial industry being used to facilitate financial crime as it undermines the integrity of financial markets and inevitably causes wider harm to society. The FCA are looking to enhance their use of technology to more efficiently gather intelligence and data regarding AML breaches and in order to assess the effectiveness of firms’ own systems and controls.
INNOVATION, DATA AND DATA ETHICS
One of the FCA’s key initiatives for 2019/20 is to support innovation that drives more effective competition through the Regulatory Sandbox and RegTech Techsprints and strategic interventions like Open Banking. The FCA plan to undertake discovery work in order to better understand how the use of data and machine learning could shape future products and services, and as a result, the potential implications for consumers and the general functioning of markets.
Another focus of the FCA is on cryptoassets that fall within and outside the existing regulatory framework. They intend to publish a Feedback Statement and final Perimeter Guidance alongside technical guidance for treasury to consider extending the perimeter for utility and exchange tokens, and financial crime provisions to certain activities related to cryptoassets.
SECTOR PRIORITIES: INVESTMENT MANAGEMENT
The key priorities for the FCA with regards to the investment management sector (which covers asset management, institutional intermediary and advice services, custody and investment administration services) is that of operational resilience (as discussed above), addressing poor value of products as identified by the Asset Management Market Study (“AMMS”), the maintenance of stewardship principles by firms, and rules/guidance on illiquid assets.
Please see here for a previous article we wrote about the remedies the FCA seeks to implement as a result of the AMMS which are due to take effect in October 2019. Going forward, in order to show whether competition is improving over time, the FCA will report on active and tracker funds. This will include publishing anonymised data on the performance (after fees) of UK domiciled index tracker funds and long-term under-performing active funds. Data will also be published to track price trends for active and passive funds investing in certain comparable asset sectors to facilitate price comparisons for customers.
With regards to stewardship, the revised Shareholder Rights Directive (“SRD II”) will be implemented in the UK by June 2019 and the FCA are currently in the process of finalising their rules in due course. The key proposed changes to SRD II are as follows:
- regulated asset managers and life insurers will now need to disclose details of their stewardship policies, including their arrangements for engaging with certain investee companies and how they exercise their voting rights. This aligns with the FCA’s current requirements under COBs, which requires regulated firms who are managing investments for professional clients to comply or explain against the FRC Stewardship Code;
- UK companies with shares admitted to a regulated market will need to seek and disclose board approval for related party transactions (“RPTs”). It should be noted that this requirement will ultimately have little impact on premium-listed issuers, who are already required to obtain independent shareholder approval before entering into an RPT; and
- a requirement for life insurers and asset managers to provide greater disclosure over their investment and asset management arrangements.
Furthermore, the FCA intends to publish a policy statement within the first half of 2019 containing the final rules and guidance with the aim of improving the standards of liquidity management in firms who manage funds that invest in illiquid assets such as property. The rules will predominantly focus on ensuring that retail clients are better informed about the inherent risks of investing in these types of funds and the steps firms can take to reduce potential risks during times of market stress.
There are a lot of reports and further guidance to be produced by the FCA over the coming year as a result of the topics discussed above, with particular importance on work that the FCA will be carrying out with regards to culture and governance of FCA regulated firms, which sits neatly alongside the upcoming SMCR regime being implemented 9 December 2019.
For more information, and any guidance or advice on any of the discussion points raised in the FCA’s business plan, and how they may affect your business, Cleveland & Co, your External in-house counsel, are here to help.