How does this regulatory plan for 2014/15 affect your firm? Our experts outline some of the key issues for which the asset management, wealth management/private banking sectors should prepare.
The Financial Conduct Authority's (FCA) Business Plan 2014/15 was published on 31 March 2014, together with its Risk Outlook 2014 report.
The FCA will be focusing on due diligence in suitability assessments, Retail Distribution Review (RDR) in practice, client money and custody rule changes, conflicts of interest within the wealth and asset management sectors, and market abuse controls within asset management firms.
Some of the key issues for the asset management, wealth management/private banking sectors to prepare for:
Client money and custody assets
FCA supervision of firms which hold client money and custody assets has intensified. This is expected to continue through a review of the client assets regime for investment business. Existing protections for consumers will be strengthened when the FCA releases new rules this year.
Conflicts of interest
Conflicts of interest are regarded as a fundamental "root cause" of poor culture and conduct for regulated firms. A conflict can arise in many different ways and the FCA intends to tackle a number of conflicts of interest issues. One area of focus is remuneration and incentive arrangements.
The FCA will be looking at the effectiveness of controls around conflicts of interest and how wealth managers and private banks control conflicts that arise when client assets are invested in in-house investment (whether manufactured by firm in-house or by a member of firm's group). Policy proposals in relation to dealing with commission rules which arose from earlier work on conflicts of interest in the asset management sector will also be published.
RDR is one of several regulatory initiatives (others include CRD IV, EMIR, MAR, MiFID II and early product intervention) aimed at supporting firms' focus on conduct issues and shoring up prudential soundness to shape up firms' strategies.
RDR forced firms to adapt their business models and distribution strategies. However, following its implementation, the FCA will investigate new risks. There are concerns around a notable increase in non-advised sales of retail investment products, and the difficulty some consumers may have in obtaining financial advice. The shift towards execution only services at the lower end of the market may present risks if complex products are purchased and the consumer has an insufficient understanding of the product. A lack of clarity around the use of non-advised services and whether consumers may believe they are receiving advice when they are not is another key FCA concern.
Wealth managers and IFAs should expect a detailed review of the RDR regime in practice throughout 2014/15. This will assess RDR's effect in practice against its objectives.
The suitability of advice remains a key theme for 2014/15.
Financial advisers will face scrutiny over the due diligence they conduct as part of their suitability assessments. The FCA will study how they approach due diligence and ensure that customers are sold suitable products and services.
Longer time limit for complaints
An increased time limit for making complaints to the Financial Ombudsman Service will be considered. The FCA is contemplating a 15-year time limit as the best consumer outcome.
Asset managers and market abuse
Fund managers facing pressure to achieve good investment performance will be the subject of a review around trading activity and whether it is consistent with FCA market conduct expectations.
This focus on market abuse is part of the FCA's wider message to all market participants that it expects them to act as 'the first line of defence' against market abuse. The FCA expects firms to monitor abusive behaviour to detect it early instead of relying solely on the FCA to monitor financial crime.
Regulatory challenges on a number of fronts should be expected by the wealth and asset management sectors.
Firms should review the FCA's 2014/15 Business Plan and Risk Outlook and:
- Make arrangements to consider upcoming regulatory changes and take them into account in relation to any future plans.
- Consider whether any changes to the firm's business model and strategy will be needed. Be prepared to demonstrate to the FCA (should it ask) that the firm has kept abreast of the regulatory changes and amended its model and strategy to accommodate new standards.
- Take into account the 'culture equation' when assessing potential regulatory risks that may be associated with the firm's services or activities. The FCA wants to see individual accountability and a responsible culture.
- Test the robustness of their market abuse controls.
Wealth and asset managers should build in time to assess global regulatory developments. More time and resource will be required to cope with the impact of EU and UK changes. All firms should review the current EU initiatives set out within the FCA's Business Plan which may impact them this year or into 2015/16 and ensure these developments are monitored.