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How will new FCA rules on showing value affect the industry by 2019?

by Heat Recruitment

It’s no secret that the Financial Services sector is seeing more regulation than ever before – despite industry leaders, including the Head of the Financial Conduct Authority Andrew Baily, expressing that Brexit should not lead to more regulation in the UK financial service industry.

Baily has now directly addressed plans for European regulators to “shake up rules” governing various asset managers once the UK leaves the EU.

He confirmed: “The truth is that delegation is a well-established global norm, underpinned by strong standards and regulatory co-operation. It is not dependent on EU membership. There is no reason to disrupt a system that clearly works effectively … I do take a strong position that Brexit does not need to be an excuse to restrict trade in financial services, and that to do so would be a mistake for all sides.”

Despite this, the Financial Conduct Authority (FCA) has now confirmed that asset managers have 18 months to prepare for a new requirement – one which comes into effect in September of 2019.

This new requirement is for asset and wealth managers to make an “annual assessment of value” – essentially demonstrating that they are acting in the best interests of their clients.

The move comes after a large number of asset managers in the UK were forced to pay out £34m in compensation to investors. Following a review by the FCA, these asset managers had failed to clearly state how funds are managed.

Megan Butler, Executive Director for Investments at the FCA summarised that the watchdog assessed 84 “potential closet tracking” funds. Of these funds, 64 failed to explain how “constrained” they were in choosing investments. Just 20 adequately explained how their funds were managed.

The issue comes from whether some funds charged higher fees for active management or selecting stocks while in practice they were just tracking, or even partly tracking, a benchmark index.

In practice, this requirement means that asset managers need to appoint at least two independent directors to their board by the deadline to manage the process. It would also require a greater level of disclosure around the type of service offered – with active tracking leading to higher fees, it would seem that this is the preferred disclosure regardless of the service actually offered.

In addition, the chair of any respective asset management firm’s board will now be directly accountable to the FCA for regulators mis-assessing the service offered.

Despite claims that Brexit should not impact regulatory consistency, the Paris-based European Securities and Markets Authority has been staunch in its refusal to accept “letterbox” entities, claiming domestic regulators must take a tougher line on policing their own sectors.

One thing is certain – increasing regulation would look to be a new part of daily life for the UK’s asset management industry. For continued profitability and success, ensuring compliance would look to be the new industry standard.

If you’re looking for the kind of candidate who can help you stay on the right side of this new glut of regulation, or are a candidate looking to work with some of the best asset management consultancies in the business, get in touch with the Heat Recruitment team today!

By Mike Garrett