INSIDE VIEW: Keeping a clean record

There are ways for fund houses to stay on the right side of the law as regulators tighten their grip, say Eve Ellis and Michael Harris at Charles Russell.

Few financial services businesses have gone unnoticed by the regulators in their recent reviews, and banks, asset managers, investment funds, traders, independent financial advisors and insurers, to name a few, are all facing their share of regulatory change.

This onslaught of regulation, the continuing difficult economic climate and the recent changes to the UK regulatory structure taken individually are challenging; when taken together they present a complex change for firms, not least to international investment funds now required to consider their compliance with multiple regulators.

Investment fund managers are now subject to a large degree of regulation and oversight, with registration a key issue, along with the requirement to disclose appropriate information to assess the risks they pose. As such, regulation will need to be at the forefront of the minds of risk and compliance professionals of investment funds over the coming months and years.  

Not only is regulation proving to be a challenge for investment funds, but recent anti-bribery/anti-corruption laws, and a stronger focus on corporate governance also need to be a daily consideration.

The new regulatory environment has seen a change in the UK structure following the dissolution of the Financial Services Authority (FSA) and the introduction of the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) as the two main regulators. While this article focuses only on the FCA’s policies and objectives, some firms also need to consider PRA regulation to the extent that they are dual regulated.

The question remains whether the regulatory reform is merely cosmetic or whether this will result in substantive change in financial services regulation. The reform could arguably be considered a mere rebranding; the FCA is generally made up of the same staff carrying out the same or similar functions as the FSA. Even if this is the case, what the change has done is give the regulator the impetus to toughen up and be more proactive. This change in ethos and approach was outlined by the FSA who said that the FCA would be a more proactive, interactive and forward-looking regulator than the FSA, which would involve a judgment-led approach intended to prevent, rather than respond to, customer detriment.

Compliance professionals working for investment fund managers should therefore prepare for the FCA taking a more interventionist and intrusive approach to regulation.

The FCA’s Business Plan highlights its key objectives, which are delivering consumer protection, enhancing marketing integrity and building competitive markets.

These objectives are enshrined in statute and form the backbone of the FCA’s regulatory plan. It is worth bearing in mind that “consumer” is defined very broadly and is not limited to retail clients. This, in conjunction with the second objective of market integrity, means that investment funds are a key focus for the FCA. As such, firms dealing solely with wholesale clients cannot ignore the FCA’s policies in relation to consumers.

It is not just domestic initiatives which will impact investment funds. There has been a plethora of initiatives at the European level including Markets in Financial Instruments Directive II, the Alternative Investment Fund Managers Directive (AIFMD), Ucits V and VI, the Financial Markets Infrastructure Directive, commodities markets regulation, the European Market Infrastructure Regulation, the Capital

Requirements Directive IV, changes to the market abuse directive and credit ratings legislation.

Of these, AIFMD is currently proving to be the main concern of those running alternative investment funds. AIFMD was implemented into UK law on July 22 and those investment funds not benefiting from the transitional period to July 22, 2014, should be considering the changes that will be necessary to ensure their fund is AIFMD compliant, which will include considerations of the fund’s structuring, its management and its legal documentation. Any investment funds not benefiting from this transition period should ensure that they are compliant now.

This era of increased regulation accompanies a time when investment funds are holding more and more records online. Not only does this mean fund documentation and investment information are kept on a central database for easy access, but it can now mean that procedures and timeframes for being regulatory compliant can be formulated. Keeping these records can be a quick and easy way to stay compliant and keep regulators at bay. Although these need to be balanced against cyber security and data protection issues.

The first step is, given the amount of regulation, to ascertain what is relevant and how it impacts your business. There are some practical tips for compliance professionals coping with the regulatory change.

First, understand the risks associated with your business. The FCA has said that it will apply a risk based approach.

As such, it is important that firms understand the risks associated with their business and implement suitable procedures in accordance with this risk assessment.

It is important to monitor the relevant changes and be on top of them, and to implement any required amendments so you are ready for implementation – waiting to make changes until implementation is required may result in breaches.

Legal teams should be engaged to ensure your legal documentation is up to date and compliant with regulatory requirements.

Also, ensure compliance procedures are up to date and that these are communicated to all staff, and regularly review and update compliance procedures.

It is important to learn lessons from enforcement actions. The lessons will also generally be wider than the specific product in question so even if not directly relevant should still be considered.

Does your business understands the risks associated with the products it is involved with? Ignorance is no excuse as has been indicated in the investigations in unregulated collective investment scheme matters.

Finally, look at the spirit of the FCA’s rules rather than the letter of them; following its principles for business is critical and much of their enforcement action has been based on the principles.

Eve Ellis is a partner and co-head of financial services sector, and Michael Harris is an associate at Charles Russell

©2013 funds europe



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