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.2 – December 2005
Welcome to the second issue of FSA’s Update on Asset Management
Asset Management Newsletter. Thank you Sector Team
to the many readers who responded to our
last edition with positive feedback and The Asset Management Sector Team is
suggestions for content in upcoming concerned with the investment
issues, some of which you will see we management of funds and customer
have incorporated in this issue. portfolios and related processes (such as
administration, custody, outsourcing, trade
In this edition, we look at some of the execution and stockbroking). We mainly
highlights of our Asset Management deal with asset managers; operators and
Conference, softing and unbundling and depositaries of collective investment
changes of control and provide an update schemes; private client investment
on MiFID. managers and hedge fund managers.
We would like to receive your feedback We are here to focus on issues specific to
and ideas for future issues. You can your sector of the industry and to make
contact us at: firstname.lastname@example.org it easier for you to do business with us.
So please contact us on
email@example.com if there is
anything you would like to discuss.
On 31 October, Andrew Shrimpton
became the manager of the FSA’s newly
Asset Management Sector Leader
formed hedge fund firms’ supervision
team. The new manager of the Asset
Management sector team will be
announced soon. But in the meantime,
please contact Ian Lumb or Jennifer
Hayward on any asset management issue.
FSA Asset Management Conference, 19th September 2005
QEII Conference Centre, London
On 19 September, we welcomed around 200 delegates from across the industry to our second annual asset
management conference, held at the QE11 Conference Centre, London. Representatives of FSA, major industry players,
trade and regulatory bodies presented on a range of topics falling under the broad headings: ‘Current challenges for
asset managers’ and ‘The hedge fund debate’.
For the benefit of those who were unable to attend, the speeches made by John Tiner and Hector Sants are available
on our website at: www.fsa.gov.uk/pages/Library/Communication/Speeches/2005/
The reporting requirements for investment management firms have not been affected by the first phase of
Integrated Regulatory Reporting (IRR) and are set out at SUP 16.7.36R.
However, all firms (unless exempt) are required to submit their complaints returns electronically via Firms Online
(http://www.fsa.gov.uk/pages/Doing/Regulated/Firms/index.shtml). Firms need to submit the return on a six-monthly
basis according to their accounting reference date. Firms are exempt if they have notified us in writing that they do
not do business with eligible complainants – see DISP 1.1.7R.
If your firm has not received any complaints relating to your mainstream regulated activities during a reporting
period, you still need to submit a nil-return.
This is not FSA guidance.
EU & International Update Capital Requirements Directive
Following the European Parliament’s approval of
MiFID update the CRD in September and subsequent
The negotiation of the level 2 measures of the endorsement of the European Parliament’s
Markets in Financial Instruments Directive amendments by EU finance ministers on 12
(MIFID) continues. The date for implementation October; we plan to produce our second CP on
of this key Directive that will replace the UK implementation in February 2006. It will take
Investment Services Directive has been postponed; account of discussions with stakeholders since we
measures for UK implementation of the Directive issued our initial CP – Strengthening Capital
must be in place by 31 January 2007 and firms Standards – in January and also of changes arising
must comply with the Directive from 1 November out the final text of the CRD. Our intention is to
2007. MiFID will only partially affect the UCITS put final rules in place in October 2006 to take
landscape given the carve-outs possible in the effect from 1 Janaury 2007.
current text. However, generic portfolio
The announcement in October of a postponement
management, provision of investment advice and
to 1 January 2009 of the implementation of Basel
custody will need to be compliant with the
2 in the US will have no impact on the European
provisions of the Directive – among other things,
timetable for implementation via the CRD. But in
it affects organisational requirements, client
consultation with the US authorities we shall be
agreements, assessing suitability and
examining means of easing the practical problems
appropriateness of services for specific clients,
that could arise for UK-based groups with
providing best execution.
significant operations in the US and for US-based
We have recently published ‘Planning for MiFID’, groups with significant operations in the UK.
a short guide highlighting the key areas which will
be affected by MiFID. European Commission Green Paper
The key messages of the document are: In July 2005 the European Commission published
its Green Paper on the Enhancement of the EU
• MiFID will significantly alter financial services Framework for Investment Funds. The paper
regulation in the UK and most FSA-regulated examines policy issues connected with the UCITS
firms carrying out investment business are likely legislation underlying collective investment
to be affected by the changes in some way; schemes and requests stakeholders’ views on
• MiFID extends the coverage of the current which areas should be examined with a view to
Investment Services Directive (ISD) regime and change, and what the priority areas for any
introduces new and more extensive reform should be. Despite this, the preliminary
requirements firms will have to adapt to, in conclusion of the Commission asset management
particular in relation to their conduct of specialists is that no fundamental overhaul of the
business and internal organisation; legislation is necessary at this stage. In the near
• so firms do not incur last minute costs and/or term, the main task will be to find ways to
additional compliance risk we recommend that enhance the effectiveness of the existing regime.
firms start planning for MiFID implementation The consultation period closed in mid-November
now; and and the Commission will publish feedback on
responses in the first quarter of 2006.
• we have published this factual planning
document to help firms with their There are several aspects of the current legislative
preparations. It is not a consultation document set-up that need clarification. Some of these are
or guidance on interpreting MiFID and does being dealt with already; these are simplification
not contain any FSA proposals on of the notification process whereby UCITS gain
implementation. We will consult on MiFID permission from the ‘host’ state regulator to
during 2006. passport into that jurisdiction. The second main
You can see this document on our website: policy area which is being clarified at the moment
http://www.fsa.gov.uk/pubs/international/ is the definition of what assets UCITS may invest
planning_mifid.pdf in. Both these areas are fundamental to the success
Page ◆ 2 This is not FSA guidance.
and consistency of the Directive. They are being However, the (new) SUP 11.3.5B must be read in
dealt with by regulators acting together in the conjunction with the other provisions in SUP 11,
Committee of European Securities Regulators particularly those at SUP 11.5.8G (joint and
(CESR), with help from the Commission. shared notifications).
With the Treasury, we have submitted a joint SUP 11.5.8G allows a firm and its controller(s) to
response to the Green Paper. In it, we agree with make a joint and shared notification to us. This is
the Commission’s analysis of the dossier and to avoid a series of persons making duplicate
support its high-priority proposals of detailed change of control notifications. A joint and shared
work on a passport for management companies, notification by the firm on behalf of itself and each
mergers and pooling and an EU-level framework of the firm’s controllers is, in our view, a valid
for private placement. We also support more notice under section 178(1) and 190(1) of the
systematic exploitation of the opportunities Financial Services and Markets Act (FSMA) and we
presented by the existing legislation, for which already recognise it as such. So such a joint and
CESR work is already under way. shared notification from the firm – which takes the
form of a pre-notification of proposed changes in
control – made in line with SUP 11.3.5B D, should
FAQs prove sufficient to ensure that each of the (named)
Here, we set out our thinking on some of the controllers as well as the firm benefits from the new
questions firms are asking. relaxations.. We may approve such changes for a
period lasting up to a year.
1. Change of Control The answer will always depend on the individual
circumstances of the firm. We aim to take a
Where do the amendments to the controllers and
pragmatic approach on these kinds of issues. If
close links rules leave the parent companies of
you have a query, please talk to the Change of
asset managers that are not carrying out
investment management activities themselves? The
restriction in SUP11.3.5B(2) suggests that the
2. Unbundling and overseas delegation
guidance will be available only to the manager.
Does the parent’s control of the investment At our firm, some cases of investment
manager mean the parent is subject to the wider management are delegated to a third party or an
notification requirements? overseas subsidiary. How does the requirement
that investment managers unbundle for clients the
The Controllers and Close Links Instrument 2004 amount of commission attributable for execution
came into force in December 2004. It contained and research apply to these?
new guidance for investment managers, clarifying
how SUP 11 applies to these firms, which are PS05/9 contains the final rules arising from our
effectively in the business of acquiring shares in consultation on bundled brokerage and soft
other firms. commission arrangements.
While not allowing blanket notifications of change Amongst other requirements, COB 7.18 will apply
of control, in SUP 11.3.5A-C we have simplified so as to require investment managers to disclose
the rules for asset managers and reduced the to their customers details of how commission
burden in respect of the changes in share payments are allocated between execution and
ownership of listed authorised firms. Some have research expenditure.
read these new provisions as meaning that only the
If a UK-regulated firm has concluded an
investment manager benefits from the relaxations.
agreement with a UK client to provide investment
This is because it is only written notifications from
management services, the firm cannot escape its
the firm that are mentioned, leaving the firm’s
regulatory duties by delegating to an offshore
controllers still having to comply with the full
affiliate responsibility for the provision of those
rigours of the change of control requirements.
services. That is because the offshore affiliate will
at all times be acting as the UK firm’s agent. As
far as the FSA is concerned, the UK firm as
This is not FSA guidance. Page ◆ 3
principal remains ultimately responsible for 2007. We are planning to consult on scheme
conducting the investment management activity pricing in the second quarter of 2006. As our chief
for its clients, so that COB 7.18 applies. Only in executive, John Tiner, announced at the FSA’s
instances where the contract for the provision of Asset Management Conference in September, our
services has been concluded between the UK client consultation starting point will be that dual
and the overseas firm, and activities cannot be pricing will be allowed for both AUTs and ICVCs.
said to be carried on in the UK, will COB not The industry has for some time operated single-
apply (COB 1.4). and dual-priced funds alongside each other
without apparent consumer detriment. So we
So the overseas manager will be subject to the believe this starting point is reasonable.
obligation to ‘unbundle’ the commission
payments. This may necessitate requesting In practical terms, our proposed policy would
information from an overseas broker, and we mean that dual-priced AUTs would be able to
anticipate numerous overseas brokers will also be carry on as before; it would also imply that ICVCs
receiving requests for information of this kind would be able to dual price for the first time.
from many UK investment managers who deal
We have no evidence at this point that giving
with them directly.
consumers a choice of pricing method would be
We would remind you that although the COB more beneficial or detrimental to them compared
7.18 rules come into force on 1 January 2006, a with mandatory single-pricing. If the forthcoming
transitional provision applies. So if any soft consultation exercise supports our policy starting
commission agreement is in place on that date, the point, then we will introduce dual-pricing
manager may comply with rules and guidance in provisions into COLL by adapting existing CIS
COB 2.2.8R – COB 2.2.20R until the earlier of dual-pricing rules into the more principle-based
the date the agreement expires or 30 June 2006. approach taken in COLL.
3. Pricing of Collective Investment
Schemes Round up
In PS04/7, the FSA said it would consider the Feedback on DP05/4
question of compulsory single pricing for dual
priced funds. What is the current position? In May, we issued two discussion papers; DP05/3
titled ‘Wider- range Retail Investment Products –
At present, regulated schemes in the UK can be Consumer protection in a rapidly changing world’
authorised under either the CIS or the COLL and DP05/4 titled ‘Hedge funds: a discussion of
sourcebook. COLL was introduced after risk and regulatory engagement’. The deadline for
consultation (CP185) in April 2004, and will responses to both discussion papers passed on 28
become mandatory for all schemes in February October, and, although we are still analysig the
2007. COLL only has rules for single pricing, responses to DP05/3, we set out below some
while CIS allows managers to choose the pricing feedback on the DP05/4.
method for AUTs (Authorised Unit Trusts) –these
can be either single or dual priced. ICVCs The responses that we have reviewed confirm that
(Investment Companies with Variable Capital) it provides an accurate assessment of the risks
have been permitted only to single price since their inherent in the hedge fund sector. There were
inception in 1997. ICVCs were designed as a really only two caveats to that view. Firstly, some
means for UK firms to compete on a level playing respondents noted that the identified risks are not
field with European counterparts –continental specific to the hedge fund sector, but rather, as we
funds are predominantly single priced. have frequently noted, that they also materialise in
other forms of asset management. Secondly, a
We are committed to review the pricing debate handful of commentators suggested that there may
before the COLL sourcebook becomes mandatory. be different views on the probability of those risks
We understand the need to deal with this issue actually crystallising.
early enough to give managers sufficient time to
handle the position that will apply after February
Page ◆ 4 This is not FSA guidance.
One area of absolute unanimity from our Capital Requirements Directive and feedback to
respondents was their warm welcome for our DP 05/2, entitled ‘Stress Testing’, which set out a
acknowledgment that hedge funds are an principles based approach.
increasingly important element of a modern and
On valuations, over three quarters of respondents
dynamic financial market place and that, as such,
expressed support for the opinion set out in the
it would not be beneficial if regulatory action
discussion paper that additional measures may be
drove hedge fund managers to move to more
justified to stimulate improvements in valuation
lightly regulated jurisdictions.
arrangements, particularly in relation to illiquid
We proposed two possible practical means by and complex assets. Many respondents suggested
which we could more clearly distinguish hedge that fund valuation was an activity with inherent
fund managers for the purposes of regulatory conflicts of interest. Valuation issues were seen as
oversight. Most respondents did not support the significantly affecting every part of the industry.
first of these options, namely obliging firms to Most respondents drew attention to the cross-
seek a separate permission before being able to border aspects of this issue and the different
carry on a regulated activity. If they had to choose approaches taken in different jurisdictions. Many
one of the options, almost three quarters of commented on the advantages of a global
respondents favoured making ‘undertaking hedge industry-led initiative, perhaps facilitated by
fund management’ a notifiable event. However, a IOSCO. They also frequently noted that existing
large number of responses highlighted the industry standards could be built upon.
difficulty in creating a definition of ‘hedge fund
On disclosure and due diligence, few respondents
management’. A meaningful definition is generally
who expressed a view supported the concept of us
seen as a necessary precursor to following either
providing guidance on these topics. Some
the ‘permission’ or ‘notifiable event’ routes.
suggested that we were well placed to facilitate
We asked in the DP for views on the optimal industry initiatives to enhance standards, although
scope of enhanced supervision of the hedge fund many noted that institutional investors already
sector. We decided to set up a centre of hedge fund conduct extensive due diligence and that standards
expertise in the FSA, which was launched on are improving.
Monday 31 October 2005 and is being run by
Finally on the issue of an industry code of
Andrew Shrimpton. This team will initially
practice, most respondents were supportive of the
relationship manage 25 groups containing 35
concept while stating that this would best be
regulated firms that were already relationship
developed by the industry.
managed in the FSA, but by different teams.
Data collection is another area where the
comments and suggestions vary considerably. The Regulation of Investment Trusts
only common themes that have emerged so far are
On 18 November 2005, the Treasury announced
that firms are willing to supply more data if it is
that it had decided no further strengthening of the
clear that the data will be used and that, in
regulation of the investment trusts was required.
considering the appropriate data set, we must
The decision was partly based on the view that
consider the international nature of this market.
forthcoming changes to Listing Rules and
In the Discussion Paper we asked for views about improvements in governance standards proposed
the use of stress testing in the hedge fund sector. by the AITC would provide sufficient protection
On this question, respondents supported the for retail investors.
usefulness of stress testing as a risk management
tool and were mainly in favour of us encouraging
the industry to develop its approach to stress
testing. Clearly our approach on this issue will
have to be determined in the context of the
This is not FSA guidance. Page ◆ 5
FSCS Funding Review consultancy Oxera to undertake a review of the
existing requirements. Oxera are consulting a
In May 2005, we announced that we were range of industry bodies through the Industry
undertaking a review of the Funding Regimes Action Group and will put forward the results of
applicable to authorised firms. The main focus of their analysis in mid-December. This analysis and
this review is of the FSCS levy arrangements. FSA consultation will play a part in informing a
has appointed the independent economics discussion paper we will issue early in 2006.
We hope that you have found this newsletter instructive and useful. We would like you to tell us
what you would like to see in future editions. For instance, we are considering including the FAQ
section as a standard item, but would be keen to know which issues are key for readers. Similarly,
if there is a subject that is not covered in this issue that you would like further information on,
please let us know.
Please note that the contents of this update do not represent general guidance.
Please send your comments and suggestions to firstname.lastname@example.org, including the
word ‘Newsletter’ in the subject line.