The Financial Conduct Authority has set out its stall for the year ahead in a letter to chief executives in the investment industry. The regulator’s letter is a reminder of the tough stance it is starting to take on many aspects of the industry. It has warned firms that their duty to act in the best interests of investors must be a priority.
The letter, written by Marc Teasdale, director of wholesale supervision at the FCA, reminded firms they play a “critical role” in the UK economy and in overseeing the savings and investments of millions of individuals. “The sector is growing and changing in significant ways, but its purpose remains unchanged: to protect and grow the capital of its customer and to oversee their investments effectively over the long-term,” he added.
Andrew Glessing, head of regulation at consultancy Alpha FMC, said that while the letter may have come out of the blue, the concerns and priorities expressed by the regulator should be no surprise to asset managers. "The FCA is increasingly open about the fact it considers that governance and conflicts management need to improve to achieve the value it seeks for investors."
Spotlight on Liquidity
In the wake of the Woodford scandal, which dominated the industry in 2019, the regulator warned firms that managing liquidity must be a priority. The FCA reiterated concerns that some open-ended funds may have a liquidity mismatch. This is an issue because funds allow investors to buy and sell on a daily basis, but the assets the fund holds – property and unquoted stocks for example – could take much longer to sell, meaning a fund may not be able to sell its assets quickly enough to raise the cash to meet investor redemptions.
Liquidity is a problem which regularly reared its head last year – firstly with the suspension and subsequent wind-up of the Woodford Equity Income fund, which had invested in small and unquoted companies, and later in the property sector, when the M&G Property Portfolio fund was forced to gate in December.
The letter also highlighted governance as an area it would be taking a renewed interest in. The FCA has urged firms to ensure there is “robust discussion and challenge around important business decisions” and to take steps to mitigate any harm arising from conflicts of interest. The regulator is evaluating the effectiveness of governance across the industry in the first half of this year.
Delivering Value to Investors
New rules now require funds to demonstrate they are providing value to investors, and the first of these reports will be published at the end of January. Already it has sparked change, with HSBC and Invesco both revealing plans to move investors out of expensive, legacy share classes and into new “clean” share classes, which are often cheaper because they don’t include bundled-in charges such as commissions.
The FCA reiterated that funds should be thinking about their obligations to retail investors in these value assessments. It said: “We will continue to take robust action where we identify funds which deliver poor value, including so-called ‘closet-trackers’.”
The regulator will be assessing in the first half of 2020 how effectively firms are carrying out their value assessments, and looking for meaningful changes on costs, fees and product design. It added: “We plan to publish certain key metrics, such as on long-term underperforming active funds and trends within the industry to provide evidence of whether the reforms are having their desired effect.”
