Insights and News /

10 October 2017

Investment and Asset Managers' conduct and compliance challenges

As emphasised by Megan Butler (Executive Director of Supervision at the FCA) last week, the FCA is taking a particular interest in the Investment and Asset Management sector, having clarified its supervisory priorities, and sees a robust regulatory environment as fundamental to the sector’s future success.

The sector is indeed facing increasing scrutiny from the FCA in relation to cultural change and effective embedding of conduct and compliance requirements. In this context, Investment and Asset Managers should be proactive and focus on the below priorities raised during the FCA speech to reduce risk of potentially expensive and invasive supervisory actions:

1. Market investigation remedies
The FCA published its final Asset Management market study report in June, outlining a number of issues, and recently referred the investment consultancy sector to the Competition and Markets Authority. This will result in a strong package of measures and remedies that will significantly impact the sector.

Whilst we cannot know for certain what the remedies might be, [we do have a view of the most likely themes] and as recommended in our blog published earlier this year, firms should start considering potential actions to avoid costly FCA-mandated remediation actions.

2. Implementing Senior Managers and Certification Regime (SMCR) requirements
Megan Butler flagged the extension of the SMCR as a priority for asset managers as personal accountability is fundamental to the future of the sector. The SMCR countdown is well and truly on – firms should consider potentially challenging implementation areas, leveraging lessons from implementation of SMCR in the banking sector last year. Key next steps for firms are to:

  • Determine ‘type’ of SMCR extension firm – confirm if you are required to comply with the core or enhanced regime
  • Avoid starting with a ‘blank’ piece of paper:
    • Review existing governance structures and arrangements
    • Identify and allocate Senior Manager functions – experience demonstrates that it is key to engage with senior managers early in the implementation process to avoid any blocking issues
  • Plan ahead – start your implementation sooner rather than later where opportunities exist.
3. Managing conduct risk
During the speech, Megan Butler also emphasised the importance of appropriately managing conduct risks, and encouraged firms to test themselves against five basic conduct questions:
  1. What proactive steps do you take to identify conduct risks?
  2. How do you encourage people to feel responsible for managing conduct?
  3. What support do you put in place to help your people improve the conduct of their business or function?
  4. How do your board and executive committee get oversight of conduct in your organisation?
  5. Are there any business activities you are engaged in that undermine your work to improve conduct?

Firms should be proactive in testing and enhancing their conduct risk framework and arrangements against these five areas to ensure that conduct risk is appropriately managed.
The FCA is sending the industry a clear message about its expectations in terms of conduct and competition, and is increasing its level of scrutiny to ensure alignment with its supervisory expectations. This represents an evolving regulatory challenge for the industry, and firms should respond through proactive and continuous enhancement of governance, processes and controls pending further direction.