FCA warns asset managers on poor governance and failure to deliver value
What has happened?
In a Dear CEO letter to asset managers issued on 23 January, the FCA suggests asset managers are not acting consistently in the best interests of their customers.
In a changing industry, the FCA says, progress is needed to avoid a collective failure to deliver value to retail investors. Standards of governance are falling below expectations – particularly at the level of the regulated entity.
The sector has been slow to identify and manage conflicts of interest, while inadequate investment in technology, systems and operational resilience risks compromising market integrity and the security of sensitive data.
What is going wrong?
The FCA is particularly concerned about product governance and asset managers’ failure to take due account of the requirement under MiFID 2018 to ensure that customers’ interests remain paramount through the product lifecycle.
Products should be designed, the FCA stresses, with the best interests of a specified target market in mind. They should not include features ‘that are manifestly not in the interests of customers,’ for example: ‘funds tracking an undisclosed index or where fees exceed target returns.’
The FCA now plans to carry out a review of how effectively new product governance provisions have been implemented across the sector, reporting back ‘in early 2020.’
The FCA also says the outcomes of its Asset Management Market Study in June 2017 should have prompted asset managers to think differently about their ‘obligations to end investors’ by assessing the value of their funds. Done properly, it suggests, this could lead to substantial improvements in investor outcomes.
Another area of concern is conflicts of interest. The FCA believes overall value for consumers is compromised when authorised corporate directors (ACDs) outsource investment management. If an authorised fund manager (AFM) manages a fund while an ACD is responsible for overseeing it, conflicts of interest could arise if the ACD worries about losing revenue if they challenge the AFM too much. Host ACDs may not be fulfilling their responsibilities effectively, the letter says, leading to poor value products and risks not being properly managed.
The FCA is also urging AFMs to tackle liquidity issues within their funds. Problems associated with insufficiently liquid assets were illustrated in 2019 by the Woodford Equity Income fund and M&G’s property portfolio. The joint review of liquidity carried out by the FCA and Bank of England that followed indicated a variety of ways in which similar issues could be avoided in future. The FCA now requires AFMs to take ‘prompt action’ based on this and on its policy statement of 30 September and letter of 4 November 2019. The regulator seems certain to be keeping a close eye on this issue for some time to come.
What do you need to do?
With the asset management sector currently high on the FCA’s supervisory agenda, it’s important you urgently review your firm’s provisions on liquidity, product design, conflict of interest, systems, good governance and consistently delivering value for customers.
How can we help you?
Our specialist team has the experience and expertise to provide effective guidance and assistance in all of the areas covered above. We can help you review the adequacy of your current provisions and ensure you’re well-positioned to satisfy the FCA’s latest regulatory requirements. To find out more, contact us at info@thistleinitiatives.co.uk or call now on 0207 436 0630.