Asset management sector team newsletter


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Asset management sector team newsletter

  1. 1. A s s e t M a n a g e m e n t N ew s l e t t e r An update from the Asset Management Sector Team Issue No.6 – April 2007 Welcome to our first Asset Management Towards the middle of the year, we will newsletter of 2007. The regulatory outlook be feeding back on the findings of our for the asset management sector this year Retail Distribution Review and the presents both opportunities and challenges. related wrap platforms project. We provide more information about this later The implementation of the Markets in in the newsletter. Financial Instruments Directive (MiFID) and the move to the Capital Requirements All our current consultations are detailed at Directive (CRD) regime is likely to affect a large number of firms within the sector. current/index.shtml In particular, the CRD introduces some new concepts which asset managers may Contents not have come across before; we outline some of their major components later in In this edition we briefly outline the key this newsletter. features of our Business Plan which apply The beginning of 2007 has also seen the to Asset Managers. We highlight some of conclusion of collective investment the key messages that asset management schemes converting from our CIS firms need to take into consideration as sourcebook to the new COLL sourcebook. we approach MiFID implementation and We are very pleased with the way firms full mandatory CRD implementation. have managed the application process in There is also a brief update on the key ensuring the smooth, relatively bottleneck- messages for implementing Integrated free transition to COLL. Regulatory Reporting. We are also continuing with our drive We will also discuss how we will be taking towards a more principles-based regulatory forward the wraps issue in light of the approach. We outlined this in our Business thematic work we conducted last year. Plan, published in February and we will We are always keen to hear from readers give more details later in this newsletter. with comments on the content of this We also published our Financial Risk newsletter. Please send any of these to: Outlook which outlined our view of risks to the financial sector in the forthcoming year and contained a section highlighting issues relevant to asset management firms. We are also likely to see further developments on the European regulatory front this year following on from the Dan Waters White Paper on Investment Funds issued Asset Management Sector Leader by the European Commission in November last year. Other upcoming events include the publication of the feedback to our private equity Discussion Paper and a Feedback Statement following on from our Industry Guidance Discussion Paper. This is not FSA guidance.
  2. 2. Treating Customers Fairly: update that govern which assets the £650 billion unit- linked insurance sector can invest in. Treating Customers Fairly continues to be a key FSA For further information please follow this link: initiative which intends to achieve improved outcomes for consumers. We have challenged senior management in firms to ensure that customers are 2007/07_07.shtml treated fairly throughout the business and to address those areas where customers might be vulnerable to Capital Requirements Directive (CRD): unfair treatment. key messages for firms In the July 2006 publication ‘Treating customers fairly – towards fair outcomes for consumers’, we You should now have received a letter informing said we expected all firms to be ‘implementing’ TCF you of whether our new CRD rules apply to in a substantial part of their business by the end of your business. The table below outlines those March 2007. We are now conducting visits, surveys changes to the rules (and the Handbook section and using our knowledge gained from supervision in which they belong) which have applied since to make an assessment of firms’ progress against 1 January 2007. this deadline. We plan to publish our findings before the summer. New definition of Capital (GENPRU 2.2) Resources As part of the TCF programme we also published a Discussion Paper on ‘The responsibilities of providers Revised trading book and (BIPRU 1.2, and distributors for the fair treatment of customers’. valuation requirements GENPRU 1.3) We wanted to explore the TCF issues raised in scenarios where more than one firm is involved in Fixed overhead (GENPRU 2.1.41 and supplying a product or service to retail customers. requirement replaces 2.1.46) We received over 60 responses from the industry and expenditure requirements firms and we are now reflecting on the responses to Changes to Market Risk (BIPRU 7) determine next steps. We are also doing some work excluding interest rate on product design, and intend to publish our specific risk calculations conclusions alongside the finalised and treatment of credit Provider/Distributor statement in the coming months. default swaps Link to the TCF library - Consolidated supervision (BIPRU 8) for group library/index.shtml CP07/6: Funds of Alternative The following list outlines those changes to the rules which will be part of the transitional approach. Investment Funds (FAIFs) These will be optional for firms until January 1 2008, when they will become mandatory. The Financial Services Authority has set out proposals that would allow for the first time the New approach for Credit (BIPRU 3, 4, 5) creation of funds of hedge funds (and other funds Risk of unregulated schemes) in the regime for authorised retail collective investment schemes.For New approach for (BIPRU 9) further information please follow this link: operation risk New approach for (BIPRU 13, 14) 2007/07_06.shtml securitisation Exposure values for derivatives & settlement CP07/7: Permitted Links for Long ICAAP and SREP (GENPRU 1.2) Term Insurance Business Disclosure (Pillar 3) (BIPRU 11) The Financial Services Authority has set out requirements proposed changes to its ‘Permitted Links’ rules Page N 2 This is not FSA guidance.
  3. 3. In addition to these changes, the expenditure-based Mandatory Electronic Reporting (MER) requirement principally applied to CRD firms will be replaced by the ‘fixed overhead requirement’. Our IRR programme is in the process of You should also consider whether you will require developing a strategic reporting solution (MER) any ‘embedded waivers’ before the implementation that will give firms a range of suitable of the full rules in January 2008. For further submission methods to help cost-effective and information, please see efficient reporting of regulatory data. However, as MER is a long-term strategic solution that will International/basel/info/embedded.shtml . not go live until 2008/2009, there are a number of reporting changes for firms in the meantime. If you are subject to the new rules you should now These changes are driven by a number of factors, have received a letter indicating the category in among them EU Directives. which we believe your firm belongs. We have based your firm’s categorisation on the current scope of permission for your firm. We would highlight that it Early Reporting as a result of the CRD is your responsibility to ensure that your firm’s permission is a proper reflection of its current Those firms impacted by the new CRD regime have range of activities. If you have any queries about had to report certain data under our Early your letter you should contact our firm contact Reporting system (ERS) since 1 January 2007. centre or your other supervisory contact. These new reporting requirements will apply to credit institutions and those investment firms that If your firm undertakes solely CIS activities which are subject to the FSA rules implementing the CRD. are exempt from MiFID under article 2(1)(h), you For further information about Early Reporting should consider whether you need to apply for a please visit our website: variation of permissions to clearly identify that you fall outside the scope of the Directive as your firm is a UCITS firm. Returns/IRR/Dates/index.shtml For further information on CRD please follow the below link to the relevant area of our website: New Reporting on Firms Online There will be further reporting changes in April International/basel/info/index.shtml 2007 when an additional number of firms will have to start submitting the non-financial aspects We are also running training programmes for industry of the Retail Mediation Activities Return (RMAR) practitioners. For more information on taking part in and Mortgage Lending and Administration Return these programmes please see our website: (MLAR). A suspension was in place for this group of firms until our Board decided to remove the workshops/index.shtml suspension of these rules in November 2005. We set out the detailed rules in FSA rules instrument: FSA 2005/63 Integrated Regulatory Reporting Integrated Regulatory Reporting in (Amendment) Instrument 2005. To find out if 2007 you are subject to these new reporting requirements please follow the link below: Integrated Regulatory Reporting (IRR) is the approach to regulatory reporting which we introduced after our 2003/2004 Plan and Budget Firms/phase2/index.shtml commitment to harmonise the existing (pre-N2) number of inconsistent reporting requirements. MiFID Developments and update We recently consulted on a number of changes to the reporting requirements for investment firms, Our recent Policy Statements transpose MiFID for which will impact on firms operating in the asset FSA-regulated firms and markets and allow firms to management sector. press ahead with their plans in preparation for the 1 November commencement date. This is not FSA guidance. Page N 3
  4. 4. PS07/2, Implementing the Markets in Financial Article 4 notification to the European Instruments Directive Commission 2007/07_02.shtml provides initial feedback on our HM Treasury made the Commission aware of our July and October Consultation Papers on firms and intention to make certain additional requirements – markets issues and our new Conduct of Business these requirements remain as we proposed in Sourcebook. CP06/19 and we have provided the Commission with the justifications for their retention. PS07/3, Reforming the Approved Persons regime. Consultation on these notifications closed alongside Policy Statement on Section IV of CP06/15: Markets our wider review on 23 February. If we need to in Financial Instruments Directive make any further notifications to the Commission when we have made our final rules, then HM 2007/07_03.shtml confirms the MiFID-driven Treasury will again make them on our behalf. changes to our Approved Persons regime. We have also published PS07/5 - Perimeter Other_publications/EU/eu_docs/article4.shtml Guidance relating to MiFID. The guidance will help Andrew Sykes, Head of the FSA’s Retail firms judge whether they fall within the scope of Investment Policy department, recently spoke at MiFID and should reduce firms’ costs by cutting the MiFID for Investment Managers conference down on the need for them to obtain legal advice on hosted by Informa. The speech deals with a scope issues. PS07/5 complements our work in number of the issues asset managers are likely to individually helping firms understand their status face as a result of the new MiFID rules, and it is under MiFID and the CRD. We will also publish likely to be of interest to firms that will be shortly a practical guide for firms with the affected by the directive. You can see the full text notifications and applications they may need to of the speech below: make as a result of MiFID Implementation. Communication/Speeches/2007/0220_as.shtml 2007/07_05.shtml There were a number of areas of non-MiFID CIS update business within the scope of NEWCOB that we were not able to include in CP06/19 or 20. We aim to publish a CP on those ‘deferred matters’ towards Submitting documents for authorised funds the end of April. Managers of authorised funds (ICVCs and We also expect to publich a CP in Q3 that picks up authorised unit trusts) are required to send us consequential changes that need to be made to the copies of each fund’s annual and half-yearly long Handbook as a result of the MiFID-driven changes reports and accounts once they are published. In to the Handbook and to UK legislation. the past, firms have usually sent us printed copies by post, but did you know you can now do this Level 3 and Best Execution update electronically instead? Simply send us your document in PDF format to: Although the end may be in sight for our Handbook changes, there are still challenging practical and Sending electronic files will make the process operational issues to be tackled. In the next few easier for you and will help us to save money on months CESR is aiming to finalise guidance on storage costs. For UCITS schemes, copies of the priority Level 3 issues about which firms need simplified prospectus can also be sent to us in this clarification. So far, CESR has issued final guidelines way. Please note that we do not require copies of and recommendations on record keeping and short reports. market data consolidation and aims to issue guidelines on inducements, passporting, transaction Approach to Wrap Platforms reporting and best execution shortly. You should be aware of the ongoing retail You can find more information through distribution review launched in June 2006. Page N 4 This is not FSA guidance.
  5. 5. The review is considering distribution of retail possibility that our regulation could inadvertently investment and savings products by banks, life drive the wraps market in directions that are not insurers, financial advisers, building societies, fund necessarily ideal. managers and platforms and is focusing on the With these factors in mind, we plan to publish a following themes: Discussion Paper in the second quarter of 2007 • the sustainability of the sector; looking at the risks and opportunities that the platforms present. • the impact of incentives; In the coming months, we will be looking for • professionalism and reputation; input from across the industry. We have been • consumer access to financial products and approached by a number of firms that want to services; and open a regulatory dialogue on the underlying issues and we are more than willing to do this. • regulatory barriers and enablers. We aim to publish a Discussion Paper in the second Potential Fraud at Fund Management quarter of 2007 setting out our analysis, our initial conclusions and commenting on potential solutions. Firms It is likely that this Discussion Paper will result in further consultation including on the costs and The FSA is aware of a method of account benefits of any change. Our preference is for an takeover fraud being targeted at customers of fund industry-led solution, so we have set up industry management firms. It involves the impersonation groups to work with us on this. of customers and redemption of their holdings. This fraud has primarily targeted directors of In parallel, we are looking at particular industry firms and has to a large extent been thwarted by developments that might affect retail distribution. systems and controls firms have in place to ensure One example is our work on wrap platforms and the security of their clients’ assets. However there fund supermarkets, which are systems that advisers have been a number of attempted frauds that have can use to view and administer clients’ portfolios. led to losses and we urge firms to ensure that the Our own and other industry data indicate that the systems and controls they have in place are secure adoption and use of wrap platforms amongst and robust. advisers and other financial intermediaries is growing, and fast. For further information on this matter please contact the Financial Crime Sector Team at the We believe that platforms have the potential to FSA on: support a range of positive features for both providers and distributors. For advisers, platforms can help organise and administer Financial Risk Outlook 2007 customers’ accounts; they might offer access to Our Financial Risk Outlook (FRO) 2007 is new tools for assessing and recording clients’ designed to raise awareness of the priority risks needs and wants; or they could even be a means which we believe we should consider, along with for firms to gain access to discounted – or perhaps providers and users of financial services. customisable – products. Also, some platforms are currently being marketed as a tool to help The weight of international regulatory reform that advisers provide ongoing advice – or even is due to come into force over the next year is discretionary management – to their clients, likely to pose a significant challenge for firms in instead of focusing on single transactions. the asset management sector as many will be impacted by both the CRD and the MiFID We are also conscious that the development of directives. This could be a significant burden to wrap platforms could lead to increases in both firms that have not considered these developments complexity and costs to clients, without new – or in their plans for the forthcoming year. valued – services being received in return. It is important that firms properly consider how using On the operational risk side, the document drew a wrap platform might impact on the products or attention to the increasing use of derivatives by services they offer their clients. In addition to asset managers, in both their retail and these sorts of risks, we are also aware of the institutional business. This will place increasing This is not FSA guidance. Page N 5
  6. 6. demands on both the front and back offices of instruments. We will also be considering the firms that may not have used these instruments impact of our rules on the use of dealing before. We also drew attention to the new commissions by investment managers. conflicts of interest that firms may experience For the full text of the document please follow the because they are investing in new instruments. below link: For the full text of the documents and a podcast summary of the wider findings of the report, Plan/bp2007.shtml please follow the link below: Correction to the International Outlook/fro_2007.shtml Regulatory Outlook Volunteer presenters sought by the We would like to point out that in that part of the FSA! asset management sector message dealing with the CRD (page 25), we mistakenly referred to ‘pure’ The FSA is looking for firms who would be asset managers as those who deal as principal. interested in delivering one of our financial ‘Pure’ asset managers are those that deal as agent. capability seminars. The aim is to provide general They will mostly fall within the limited licence financial education to employees in their place of category of CRD firms. work through accessible resources and seminars delivered by volunteer professionals from the Secondments financial services industry. If you want more information please contact Darren Moxom on The FSA and many asset management firms have 0207 066 0738 or visit our website previously enjoyed mutual benefit from ongoing secondment opportunities afforded to FSA staff by contact/speakers.html investment management firms. The secondments are arranged via the Investment FSA Business Plan 2007/2008 Managers Association (IMA) and Association of Private Clients, Investment Managers and We have published our Business Plan for the year. Stockbrokers (APCIMS) and involve FSA staff The Business Plan sets out our priorities for the spending either 6 months or 6 weeks at asset year ahead under our three strategic aims: management firms learning how these businesses i. promoting efficient, orderly and fair markets; are run through hands on involvement at the firm. ii. helping retail consumers achieve a fair deal; and We are currently looking for firms to be involved in 2007’s round of secondments. For those IMA iii. improving our business capability and member firms interested in providing six month effectiveness. placements please contact Victoria Nye at the The document sets out much of the work that is IMA on or 020 7831 likely to be of interest or affect firms in the sector. 0898. For those APCIMS member firms To summarise this briefly, our asset management interested in providing six week secondments work this year will touch on a number of different please contact Jason Baxter at APCIMS. To find areas. We are, for example, looking to continue out more about the secondment process from an our work examining valuation processes for FSA perspective please contact the Asset illiquid assets at hedge fund managers and Management Sector Team on: combining this with the ongoing input into the IOSCO working group on valuations. During 2007/08 we will review firms’ governance, systems and controls, and risk management processes to assess whether firms are adequately controlling the risks surrounding the use of these Page N 6 This is not FSA guidance.
  7. 7. FSA Asset Management Conference Provisional date 20 September 2007 QEII Conference Centre, London Following the success of last year’s FSA Asset Management Conference, plans are in progress for the next in the series. For further details on the planned conference please visit our website: