With an estimated 2,600 firms with assets under management of approximately £11 trillion, the UK is by far the largest asset management centre in Europe and the second largest globally. More than that, the role that asset management plays in channelling new capital to public and private companies makes it systematically important to the financial system. In the UK, the sector continues to be largely governed by EU-derived requirements – namely the MiFID, AIFMD and UCITS regimes – following the on-shoring of the relevant legislation at the end of the Brexit transition period. The current legal and regulatory framework comprises a complex patchwork of separate regimes.
With the Financial Services and Markets Bill making steady progress through Parliament, discussion is turning to the detail of how the Government and regulators should shape the UK post-Brexit regulatory framework for asset management. Under the Future Regulatory Framework (FRF), the FCA will be responsible for those EU retained laws that set requirements for asset management firms. It will “need to decide whether [UK] rules should in future copy those requirements”. Against this background, the FCA has published a discussion paper (DP 23/2) covering a wide range of topics relating to the regulatory regime for asset management as it seeks industry input on how best to create a framework that continues to be “coherent, agile and internationally respected”. While no detailed recommendations are made at this stage, the paper serves to facilitate an open discussion with stakeholders as the FCA considers what changes to make and prioritise when reviewing the regime.
While the paper focuses most on the conduct and operations of firms, its scope is wide-ranging. The paper should also be seen in the wider context of various other reviews and initiatives in the sector, including the Treasury’s review of the UK funds regime (response published February 2022) and the previous recommendations of the UK Funds Regime Working Group.
Objectives and outcomes
There is no doubt that the FCA has a tall order when considering how best to approach reform in the sector. The FCA must meet its statutory objective of ensuring that markets function well, but (when the Financial Services and Markets Bill is passed) will also have a new secondary objective of facilitating the international competitiveness of the UK economy (including the financial services sector) and growth in the medium to long term. Further, the Government has set out certain priorities which are relevant to the outcomes that the FCA is seeking to achieve – among other things, better consumer outcomes and protection, delivery of “smart” reform, desire for “swift” implementation of the outcomes of the Future Regulatory Framework Review, and active support for innovation and the use of technology in financial services.
Areas for reform
The paper considers four broad topics – with more detailed discussions of possible reforms to a number of areas within each topic:
- The structure of the asset management regulatory regime as a whole
- Improving the way the regime works (covering more granular conduct and product rules)
- Technology and innovation (covering the role of technology in various aspects of asset management and fund operations)
- Improving investor engagement through technology
A high level summary of some of the areas covered is set out in the Appendix to this briefing (download full publication for the Appendix).
Tension between different objectives and outcomes
The scope of reform that the discussion paper addresses is ambitious. However, any attempt at a complete regime overhaul to simplify the framework may be tempered by other outcomes that the FCA is seeking. In recognition of the global nature of the asset management industry, the paper notes that the UK regime must work and interact effectively with the regulatory requirements to which firms are subject in other jurisdictions. The FCA must therefore have regard to relevant international standards in order to avoid creating unnecessary layers of complexity. Further, a cost-benefit analysis should be undertaken in relation to any change – as the FCA states in the discussion paper: “where the rules currently work effectively, there may not be enough benefit to justify changing them, even if the resulting regulatory landscape is not as simple and coherent as one redesigned from first principles.” In other words, the FCA acknowledges that perfection can be the enemy of the good. We may, at least initially, see incremental steps - for example more guidance on expectations - rather than major structural change.
Drawing the right lines between investor protection and investor flexibility
As seen in its discussion around the boundaries and thresholds for both retail and professional funds as well as the discussion on rules relating to eligible assets for retail funds, the FCA is constantly having to consider the right balance between investor protection and giving investors, including retail investors, more flexibility and investment choices. With respect to the requirements on prudent risk diversification, some, for example, have argued for the removal of quantitative limits and a move to a principles-based approach, but this may be seen as a bold step for retail funds. This will no doubt be an ongoing debate as the FCA develops its proposals for reform in future consultations.
Increasing importance of technology-led solutions
It is clear that the FCA is keen to push the UK as being at the forefront of using technology-led solutions to “support better outcomes” for investors and modernise the operation of authorised funds. While any concrete proposals as to how the rules could be amended to facilitate this remain far off at this stage, the FCA is clearly of the view that technological changes can be harnessed to increase operational efficiency, resulting in better consumer outcomes such as reduced costs, better access to information and more scope for investor engagement.
Conclusion - feedback wanted
The FCA is clear that it wants feedback from a wide range of stakeholders in order to form a “balanced viewpoint” on areas of focus and intends to engage extensively with stakeholders through the use of roundtables and other forums. The FCA welcomes ideas that stakeholders may have. This is reflected in the open-ended nature of many of the questions that the FCA asks in the discussion paper. The paper presents an opportunity for asset managers and recipients of their services to participate and engage in the shaping of UK’s future regulatory framework for this critically important industry. The FCA is requesting responses by 22 May 2023.
“We want feedback as we start to think about what the FRF means for the UK rules for asset management. This feedback will help us decide what we should prioritise.” FCA, DP 23/2
For the full briefing, including the Appendix, please download the publication.