FS risk and regulation briefing Business plan and risk outlook 2014/2015: Implications for the asset management industry April 2014 Summary On 31 March 2014, the Financial Conduct Authority (FCA) published its 2014/15 Business Plan1 and 2014 Risk Outlook 2. These publications were accompanied by a speech by Martin Wheatley3. The Business Plan and Risk Outlook sets out the activities that the FCA intends to carry out in 2014/15 to protect consumers, enhance market integrity and promote competition and its approach to the risks to its objectives. The FCA has stated that it will continue to focus on culture and people – embedding transparency and fairness to encourage confidence in UK financial services. As highlighted by Martin Wheatley in his speech, the FCA believes the UK financial market needs to consider how it is perceived by the public and globally, to ensure international trust and confidence are maintained, as well as remove the ‘unresolved tension between their people wanting to do the right thing…and their being correctly incentivised to do it’. These considerations will be the basis of the FCA’s continued drive on culture for the next 12 months in retail and wholesale markets. This summary details the relevant key points covered in the Business Plan and Risk Outlook for the asset management industry: The Business Plan states that the three key operational objectives of the FCA continue to be as follows: • supervisory approach; 1. to secure an appropriate degree of protection for consumers; • conflicts of interest; 2. to protect and enhance the integrity of the UK financial system; and • policy and regulatory environment. • culture and incentives; • promoting effective competition; • financial crime and market abuse; and 3. to promote effective competition in the interests of consumers. http://www.fca.org.uk/news/about-us/business-plan-2014-15 http://www.fca.org.uk/news/about-us/risk-outlook-2014 3 http://www.fca.org.uk/news/leadership-and-conduct 1 2 Supervisory approach The Business Plan states that supervision will focus on firms’ culture, business model, remuneration practices and the accountability of senior management for compliance and conduct issues. This is consistent with the FCA’s recent release on its approach to supervision4 which stated that the FCA will be looking to ‘find where problems flow from and address them at the source’ through the use of a business model and strategy analysis (BMSA). The BMSA, already widely used by the Prudential Regulation Authority (PRA), will require firms to clearly articulate their strategy, business plan and potential weaknesses. The FCA will expect firms to ensure consumer interests and market integrity are at the forefront of their operations. The BMSA will be a useful tool for firms to evidence this, used as part of the proactive, forward looking and collaborative supervisory approach of the FCA. The FCA will continue to use thematic reviews and market studies to approach supervision in an informed and relevant manner. This will be coupled with the FCA engaging with relevant stakeholders at all levels of the value chain, i.e. consumers through to product providers. Culture and incentives “If the first year [of the FCA] has seen the concept of good conduct go to the top of the agenda in boardrooms across the City, in our second year we must push for this culture change to feed through from trading floors to high street bank branches.” The culture in firms and more widely across the financial markets is a key theme of the Business Plan and Risk Outlook, as the FCA looks to continue to tackle this objective further and change public and international perceptions of the UK financial industry market. Poor culture and controls threaten the integrity of the UK’s financial market as scandals continue to hit the headlines, which is affecting consumer confidence and global reputation. The FCA will pay close attention to culture and governance issues in firms as it seeks to pick up potential problems early and intervene to prevent harm to consumers. In doing this, the FCA intends to focus on the following areas: • suitability and structure of remuneration schemes, i.e. whether employees are incentivised to behave unethically; • managing misselling and sales practices; • fair treatment of long standing customers; • due diligence in effecting suitable investment selection and governance oversight; and • charging structure. Consideration and evidencing of their approach to culture will help firms to be prepared for any scrutiny and subsequent challenge from the FCA. Promoting effective competition “We will continue to advance our new competition objective, working to build orderly and competitive financial services markets.” Competition will be an increasing area of focus for the FCA as a means of fulfilling its objective of promoting effective competition in the interests of consumers. The FCA has identified the following as being key metrics of this objective: • better value for consumers; • genuine choice for consumers; • quality products and services; and • useful innovation in financial services. Over the next 12 months, the FCA will prepare to use its powers to enforce competition law from 1 April 2015. These powers will be exercised concurrently with the Competition and Markets Authority (CMA). Aside from educating and training staff accordingly, preparation will include: • conducting market studies on particular products and services as well as identifying specific firms as part of the study; • interacting with stakeholders (firms, intermediaries, trade bodies, consumers and consumer bodies); • looking at consumer behaviours; and • reviewing and enhancing existing competition rules as appropriate and including them in the FCA handbook http://www.fca.org.uk/about/what/regulating/how-we-supervise-firms/ourapproach-to-supervision?RRU0314&section=intro 4 Conflicts of interest Policy and regulatory environment “Exploitation of, or failure to manage, conflicts can undermine market integrity and competition and can cause harm to consumers.” The FCA will continue to focus on establishing itself as a credible contributor to, and influential member of, the global regulatory community. Following the upcoming European elections, the FCA will be taking part in shaping the European agenda of the newly formed institutions. The FCA has identified the management of conflicts of interest as being an area in which there is need for tighter controls and supervision. The Business Plan and Risk Outlook identify a number of scenarios where conflicts are arising, such as: • inherent conflicts in structures and business conduct; • use of in-house funds in wealth management firms; and • agency responsibility of asset managers. To manage the conflict of interests theme, the FCA will be performing ongoing thematic work on the risks arising from remuneration practices which do not demonstrate a good balance between reward and the interest of the consumer. The FCA will continue to review the client assets regime for investment business and publish new rules to strengthen existing protections for consumers and enhance the integrity of UK financial markets. The way in which firms approach conflicts of interest is likely to come under scrutiny in the following months. Firms may wish to review their approach to conflicts, notably processes and procedures, but also ensure that the register is up to date. Financial crime and market abuse “We expect market participants to act as the first line of defence against market abuse and not to rely solely on us to monitor financial crime.” The FCA will be looking at the market abuse controls in place to ensure that trading activity is consistent with the expectations of the FCA in terms of market conduct. The FCA expects a collaborative approach from firms with shared responsibility for the prevention of abuse and distortion of the market. Additionally, the FCA will continue to work closely with the police and other enforcement agencies to tackle financial crime. There will be engagement on internal and European policy, embedding the European regulatory environment such as AIFMD and implementing MiFID II into the national regulatory framework. As well as onboarding new regulation, the FCA will be conducting a post implementation review of the Retail Distribution Review. Next steps There will be an increase in the use of thematic reviews within the asset management sector and the processes and controls around information flows. Firms may benefit from taking a proactive approach to managing their relationship with the FCA. This could be done by considering whether their strategy and operational infrastructure meets the FCA’s expectations. The BMSA is an excellent opportunity for firms to demonstrate to the FCA that they understand what is expected of them and that their business is aligned to these expectations. It is clear from the Business Plan that the FCA will expect to see evidence of firms embracing an appropriate culture across the organisation. What does this mean for you? Our asset management regulatory specialists continue to provide support for firms as they adapt and enhance their operations in line with regulatory change. Some of the key questions asset managers should be considering over the next 12 months are outlined below: In relation to the prevention and early detection of financial crime, the FCA will: • Do you have a BMSA? How does it meet the FCA’s expectations and is it properly challenged at the Board? • oversee the suspicious transactions that firms are required to report; • How well will your market abuse controls stand scrutiny when the FCA conducts its thematic review? • oversee trading venues’ surveillance systems; • Have you decoupled research commission payments from trade flows? • continue to enhance its own surveillance systems; • take tough action against those who abuse the markets; • educate firms by means of a newsletter (Market Watch) and industry panels; and • look to strengthen and encourage the practice of whistleblowing within the industry. In relation to its continued assessment of anti-money laundering (AML) processes and controls the FCA will perform focused thematic work, looking at the judgements being made in relation to money laundering risks and the firm’s AML culture. The FCA also intends to look more closely at the processes and controls in place at smaller firms. • Are your conflicts registers up to date, and controls adequately assessed? • How does your organisation define its culture? Does the existing culture drive good outcomes for your clients and how do you demonstrate this? Contact For more information or to discuss any of the issues covered above please contact: Amanda Rowland Partner, Asset Management Regulatory Practice E: [email protected] T: +44 (0) 20 7212 8860 www.pwc.co.uk This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2014 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. 140410-150344-LO-OS