April 2013

REGULATION: Exposure on the peaks

PeaksThe UK financial regulator’s tougher style of policing fund management is biting as it changes this month to the ‘twin peaks’ model, finds Nick Fitzpatrick. The more intrusive approach to regulation promised by the UK’s Financial Services Authority (FSA) has materialised and it is causing discomfort at the highest levels of management. The FSA’s more aggressive stance, which started after the 2008 financial crisis, has meant much more contact with compliance officers and senior management. As the body reorganises itself into two regulators from this April, more firms will find themselves having to explain to officials why they deserve the status of a UK-regulated fund manager. Funds Europe canvassed a selection of law firms and third-party compliance providers for their views (see pages 26-28). “Our experience is that the supervision teams at the FSA have been more challenging, especially towards senior management, during their visits and firms have found the experience uncomfortable,” says Jonathan Mott, managing consultant at The IMS Group. Speaking about the regulator’s “Arrow” visits that are used to supervise firms directly, Dallas McGillivreay, managing director at Fleming McGillivreay & Co, says: “The Arrow inspection visits are
very intrusive and there is more emphasis on the compliance officer being involved in everything.” Alex Ellerton, financial services practice director at BDO, says: “With the [Financial Conduct Authority] publicly committed to get out and see more firms, there will be some firms that, for the first time, will have to explain how their business strategy is viable and how it puts clients at the heart of what they do.” MORE DISCOMFORT
The FSA this month shifts to the so-called “twin peaks” structure formed by the creation of the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA). The new ferocity of the regulator was seen with the £9.5 million (€11.1 million) fining of BlackRock Investment Management (UK) in September 2012 for failing to obtain trust letters for certain clients. The situation could have left clients exposed if BlackRock became insolvent and a glitch in a legacy system was blamed. BlackRock’s fine is important to note because the Journey to the FCA, published last year, may have given the impression that the FCA’s main focus will be on retail firms, says Ellerton. “I believe there are firms that, because they are more wholesale, believe they don’t have to worry.” Ellerton warns against this belief and an FSA survey sent out to firms recently shows the regulator’s interest. John Everett, principal at Bovill, says: “It is notable that the asset management supervision team have just issued a very basic survey to firms about what type of asset management they are doing – a positive indication that they want to know more. “Asset managers will be the biggest firms that the FCA dual-regulates, so they should expect more contact in future.” An FSA spokesman described the survey as an information-gathering exercise aimed at smaller fund management firms that would not have had much contact with the FSA before. More contact, with more managers, and at more points within a firm seems to be the way forward as the regulator continues to probe new corners of the fund management business. But as the twin peaks model takes hold, is it even certain yet which of the two regulators will have oversight of fund management? The broad agreement is that it will be the FCA. Everett says: “Now that the PRA has given an indication of which investment firms it will look to designate, it is reasonably clear that most fund managers will only deal with the FCA.” Mott says: “This is supported by the recent fee tariff data request to our clients from the FSA, which included no separate charge for PRA fees.” With this virtually established, firms will be keen to see a continuity of regulatory teams as the FSA transforms into the FCA. SPOT CHECKS
Next, how is the regulatory approach likely to evolve? Andrew Oldland QC, partner at law firm Michelmores,” says: “Regulation ‘by appointment’ is likely to diminish.  There will be more spot checks and less time to prepare for visits.” Less preparation time increases pressure, particularly as regulators have shown a rapacious appetite for scrutiny of more business areas beyond the old focus on sales practices. For example, there has been a rising interest in how firms are run. Catherine Doherty, global chief executive at investment management consultancy Investit, says: “There is a changing regulatory emphasis towards corporate governance. The regulator is thinking not just about how fund managers sell anymore, but also about the fund management firm as a business." The role of non-executive directors (neds) – highlighted with John Misselbrook’s appointment at Aviva Investors recently – could be relevant here. Misselbrook is the former chief operating officer at Baring Asset Management. Paul Willis, associate director, risk and regulation at Navigant, a business consulting firm, says: “The FSA made the forceful decision in 2010 to engage with neds more directly. They have been made more responsible for ensuring customer conduct is at the heart of a business.” FACING OFF CORRECTLY
Neds give the regulator more people to shoot at, while the expanding spectrum of regulation provides more things to shoot at them for. Discomfort certainly looks set to increase. Fines might, too. Therefore, it is vital that fund management firms adapt to the new regulatory system. This can partly be achieved by anticipation of regulatory trends and identification of which staff and managers are needed to face-off correctly with regulators. If both peaks of the twin peaks system are involved, then this could be particularly complex. The twin peaks may come to feel more like dual blades. ©2013 funds europe

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