For those asset managers’ legal and compliance teams who breathed a sigh of relief in January when MiFID II was implemented, the next items on the UK regulatory change agenda probably include the Financial Conduct Authority’s Asset Management Market Study (AMMS), the Senior Managers and Certification Regime (SM&CR) and responding to Brexit.
The AMMS final remedies published in April were well signalled by the Financial Conduct Authority (FCA) and are broadly in line with the expectations set in its 2017 Final Report.
Arguably one of the more challenging aspects will be complying with the requirement to measure, report and act on ‘overall value delivered’. Some may be tempted to look at the non-exhaustive list of factors the FCA has provided in the final rules as a checklist to follow to demonstrate compliance. Whilst it is clear that the FCA expects those factors to be included in any assessment of overall value delivered, to focus only on those elements could be to miss the point.
The FCA appears to be looking for firms to demonstrate a meaningful understanding of the value delivered to investors, which begs the question: what is value and is it harder to measure for certain sectors within the industry? By combining this requirement with the need to have a senior individual in firms taking responsibility for meeting it under the extended SM&CR, the FCA is emphasising its willingness to use its supervisory framework to advance its competition objective.
The SM&CR implementation will for many firms appear, at first, a fairly straightforward mapping exercise of approved persons to senior managers and there is some truth to that, at least for firms who will be in the ‘core firms’ category, that have a simple governance structure without matrix management and who aren’t part of a complex international group. For firms who fall outside those parameters, experience of working with banks to embed the SM&CR indicates that greater complexity awaits. In particular for larger and international firms, untangling years of deliberately legal entity agnostic thinking, as businesses that define themselves globally or divisionally need to align on a legal entity basis under the SM&CR, could be a cultural challenge.
Understanding which senior manager has both power over and responsibility for a business area may not be simple.
In the background is the prospect of Brexit. The impact on firms of the UK leaving the EU will depend upon their current structures, the products they offer and their client base. For some managers, this will be of limited impact, focused mainly on ensuring distribution networks can be maintained or replicated in the EU. For others, a more significant change may be needed, including the establishment of new substantial entities. A greater challenge will be posed if changes are required to existing delegation arrangements.
If transitional arrangements are put in place that require the UK to continue to comply with EU rules, a range of measures such as Capital Markets Union and the European Commission’s recent proposals on sustainable investment could come into effect before those arrangements end. All this indicates a busy regulatory change agenda for asset managers. We’re not there yet.
Emma Rachmaninov, partner with Freshfields Bruckhaus Deringer
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