April 2013

REGULATION: The new regulatory vista

Mountain peaksFunds Europe asks a selection of professionals how they see the UK’s regulatory landscape evolving under the twin peaks model. Is it clear which of the two bodies ­– Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) – has responsibility for which type of financial institution from an enforcement perspective? Chris Warren-Smith, head of regulatory team, Fulbright & Jaworski
The PRA will be responsible for the regulation and supervision of “systemically important” firms, including banks, building societies, insurers and certain systemically important investment firms. The FCA will be responsible for the conduct of all firms currently regulated by the FSA, including those firms falling under the auspices of the PRA. John Everett, principal, Bovill
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. Asset managers in a banking or insurance group may come under some scrutiny from the PRA, particularly if they carry out activities which could be classed as “shadow banking” – for example, operating a money market fund. Jonathan Mott, managing consultant, The IMS Group
It is clear that these firms will be regulated and supervised by the FCA. This is supported by the recent fee tariff data request to our clients from the FSA, which included no separate charge for PRA fees.  
There may be an issue for the biggest players if the fine or remediation of an issue will have a prudential impact for which the PRA may have responsibility, depending on the size of the firm. But, the process seems to be relatively well set out in the notes to the Financial Services Act 2012. Andrew Oldland QC, partner, Michelmores
For those institutions that will be dual regulated, any enforcement action is likely to be taken by the regulator within whose remit the breach has occurred. Given the nature of its work, the FCA’s enforcement activity will be more common.Has regulatory activity of fund managers become more heavy-handed?
Jacqui Hatfield, partner, Reed Smith
Fund management is on the FSA radar in a way that it was not before. This is mainly to do with issues with hedge fund managers, such as rumours, insider dealing, short selling, systems, controls and liquidity.
It has also been about the Alternative Investment Fund Managers Directive and suitability issues regarding products, such as unsuitable sales or inclusion in portfolios of unregulated funds and structured products. Money market fund managers have had a lot of attention because of the focus on shadow banking. However, most smaller fund managers – in particular, long only – do not have a contact relationship person and still do not get much attention from the FSA. Andrew Oldland QC, partner, Michelmores
Regulation “by appointment” is likely to diminish. There will be more spot checks and less time to prepare for visits. Traditional fund managers may escape the brunt of regulatory activity which will focus on new products being brought to market. Traditional products are unlikely to attract the attention of the FCA. Jonathan Mott, managing consultant, The IMS Group
Not heavy-handed per se, but 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. The constant request for evidence, and the judgments made on the back of the lack thereof, has been a key theme. However, the FSA in most cases have been upfront around the issues that they are focused on. Dallas McGillivreay, managing director, Fleming McGillivreay & Co
The regulation of asset managers is increasing for retail, institutional and alternative investment managers. Previously, if you invested in a hedge fund, then you knew the risks. Now it is that every firm must be to the same standard of compliance, which is a good thing overall. Chris Warren-Smith, head of regulatory team, Fulbright & Jaworski
If anything, the forward-looking, interventionist approaches expected of the FCA and PRA are likely to lead to a more intrusive approach to supervision of all regulated firms. Which have been the key themes that the FSA has applied to its regulatory approach since 2008? Andrew Oldland QC, partner, Michelmores
As far as enforcement is concerned, not only have the number of enforcement cases increased, but also the focus, which is now much more frequent, includes individuals in addition to firms.
One area where fund managers are perceived to be weak is financial crime compliance. In December 2012, the FSA launched its thematic review of asset managers,
which will focus on anti-money laundering, anti-corruption
and compliance with international sanctions. Chris Warren-Smith, head of regulatory team, Fulbright & Jaworski
Significantly, in May 2012, the FSA achieved a successful insider trading prosecution leading to imprisonment of the individuals involved following a parallel investigation by the US Securities and Exchange Commission and US Department of Justice, together with the Federal Bureau of Investigation. Co-operation with international government authorities, a direct response to the global financial crisis,which highlighted the international nature of financial markets and regulatory action, remains an increasing theme of the FSA’s enforcement programme. John Everett, principal, Bovill
The FSA has been through stages of regulatory approach throughout its life – remember “principles-based” regulation? And there hasn’t been a great deal of resource applied to, or interest in, asset management supervision until recently. It is notable that the asset management supervision team has 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 should expect more contact in future. Jonathan Mott, managing consultant, The IMS Group
Key themes since 2008 include valuation controls, conflicts of interest, the quality of governance arrangements, marketing UCIS [undertakings for collective investment schemes] and improving derivative risk management practices. However, many of these themes have been escalated towards the end of its regime as the regulator felt compelled to focus its attention more closely on the asset management sector, because of the public perspective that the FSA had been too light in regulating this sector. Fund managers’ weakness perhaps was not to not engage sufficiently, pre-2008, to help set the regulatory agenda. The FSA has identified rare but material failings in investment managers, failure to manage conflicts of interest, inability to meet basic requirements of client money protection, investment in illiquid and unsuitable assets. These cases seem to highlight a basic inattention to standards of governance. Dallas McGillivreay, managing director, Fleming McGillivreay & Co
Corporate governance and the Internal Capital Adequacy Assessment Process. In general there is room for improvement on corporate governance in some cases. Jacqui Hatfield, partner, Reed Smith
The themes have been related to remuneration, liquidity – the ability to pay redemptions – rumours and insider dealing and bad feeling against hedge fund managers regarding short selling and making money out of companies not doing well. This has included recent issues regarding sovereign debt. The suitability of corporate governance at funds being managed, in particular overseas funds, is a key focus of the FSA in a way it had not been previously. The growing focus on alternative funds themselves has led to corporate governance-related issues. Some directors of funds are directors of a number of different funds and the FSA is questioning the corporate governance at these funds when deciding whether to authorise a manager, even when it is outside the scope of the authorisation. ©2013 funds europe

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