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
EU & International Update                               Capital Requirements Directive
and consistency of the Directive. They are being        However, the (new) SUP 11.3.5B must be read in
dealt with by regul...
principal remains ultimately responsible for           2007. We are planning to consult on scheme
conducting the investmen...
One area of absolute unanimity from our                Capital Requirements Directive and feedback to
respondents was thei...
FSCS Funding Review                                  consultancy Oxera to undertake a review of the
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Asset Management Sector Team Newsletter - Issue 2 December 2005


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Asset Management Sector Team Newsletter - Issue 2 December 2005

  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.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: asset.management@fsa.gov.uk it easier for you to do business with us. So please contact us on asset.management@fsa.gov.uk if there is anything you would like to discuss. On 31 October, Andrew Shrimpton Dan Waters 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/ REMINDER 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.
  2. 2. 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.
  3. 3. 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 Control team. 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
  4. 4. 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.
  5. 5. 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
  6. 6. 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 asset.management@fsa.gov.uk, including the word ‘Newsletter’ in the subject line.