FS risk and regulation briefing Business plan and risk outlook 2014/2015: Summary

FS risk and regulation briefing
Business plan and risk outlook 2014/2015:
Implications for the asset management industry
April 2014
On 31 March 2014, the Financial Conduct
Authority (FCA) published its 2014/15 Business
Plan1 and 2014 Risk Outlook 2. These publications
were accompanied by a speech by Martin
Wheatley3. The Business Plan and Risk Outlook
sets out the activities that the FCA intends to carry
out in 2014/15 to protect consumers, enhance
market integrity and promote competition and its
approach to the risks to its objectives.
The FCA has stated that it will continue to focus on
culture and people – embedding transparency and
fairness to encourage confidence in UK financial
As highlighted by Martin Wheatley in his speech,
the FCA believes the UK financial market needs to
consider how it is perceived by the public and
globally, to ensure international trust and confidence
are maintained, as well as remove the ‘unresolved
tension between their people wanting to do the
right thing…and their being correctly incentivised
to do it’. These considerations will be the basis of
the FCA’s continued drive on culture for the next
12 months in retail and wholesale markets.
This summary details the relevant key points
covered in the Business Plan and Risk Outlook for
the asset management industry:
The Business Plan states that the three key
operational objectives of the FCA continue to be
as follows:
• supervisory approach;
1. to secure an appropriate degree of protection
for consumers;
• conflicts of interest;
2. to protect and enhance the integrity of the UK
financial system; and
• policy and regulatory environment.
• culture and incentives;
• promoting effective competition;
• financial crime and market abuse; and
3. to promote effective competition in the
interests of consumers.
Supervisory approach
The Business Plan states that supervision will focus on firms’
culture, business model, remuneration practices and the
accountability of senior management for compliance and
conduct issues.
This is consistent with the FCA’s recent release on its approach
to supervision4 which stated that the FCA will be looking to
‘find where problems flow from and address them at the
source’ through the use of a business model and strategy
analysis (BMSA). The BMSA, already widely used by the
Prudential Regulation Authority (PRA), will require firms to
clearly articulate their strategy, business plan and potential
The FCA will expect firms to ensure consumer interests and
market integrity are at the forefront of their operations. The
BMSA will be a useful tool for firms to evidence this, used as
part of the proactive, forward looking and collaborative
supervisory approach of the FCA.
The FCA will continue to use thematic reviews and market
studies to approach supervision in an informed and relevant
manner. This will be coupled with the FCA engaging with
relevant stakeholders at all levels of the value chain, i.e.
consumers through to product providers.
Culture and incentives
“If the first year [of the FCA] has seen the concept of good conduct
go to the top of the agenda in boardrooms across the City, in our
second year we must push for this culture change to feed through
from trading floors to high street bank branches.”
The culture in firms and more widely across the financial
markets is a key theme of the Business Plan and Risk Outlook,
as the FCA looks to continue to tackle this objective further
and change public and international perceptions of the UK
financial industry market.
Poor culture and controls threaten the integrity of the UK’s
financial market as scandals continue to hit the headlines,
which is affecting consumer confidence and global reputation.
The FCA will pay close attention to culture and governance
issues in firms as it seeks to pick up potential problems early
and intervene to prevent harm to consumers. In doing this, the
FCA intends to focus on the following areas:
• suitability and structure of remuneration schemes, i.e.
whether employees are incentivised to behave unethically;
• managing misselling and sales practices;
• fair treatment of long standing customers;
• due diligence in effecting suitable investment selection and
governance oversight; and
• charging structure.
Consideration and evidencing of their approach to culture will
help firms to be prepared for any scrutiny and subsequent
challenge from the FCA.
Promoting effective competition
“We will continue to advance our new competition objective,
working to build orderly and competitive financial services
Competition will be an increasing area of focus for the FCA as
a means of fulfilling its objective of promoting effective
competition in the interests of consumers.
The FCA has identified the following as being key metrics of
this objective:
• better value for consumers;
• genuine choice for consumers;
• quality products and services; and
• useful innovation in financial services.
Over the next 12 months, the FCA will prepare to use its
powers to enforce competition law from 1 April 2015. These
powers will be exercised concurrently with the Competition
and Markets Authority (CMA).
Aside from educating and training staff accordingly,
preparation will include:
• conducting market studies on particular products and services
as well as identifying specific firms as part of the study;
• interacting with stakeholders (firms, intermediaries, trade
bodies, consumers and consumer bodies);
• looking at consumer behaviours; and
• reviewing and enhancing existing competition rules as
appropriate and including them in the FCA handbook
Conflicts of interest
Policy and regulatory environment
“Exploitation of, or failure to manage, conflicts can undermine
market integrity and competition and can cause harm to
The FCA will continue to focus on establishing itself as a
credible contributor to, and influential member of, the global
regulatory community. Following the upcoming European
elections, the FCA will be taking part in shaping the European
agenda of the newly formed institutions.
The FCA has identified the management of conflicts of interest
as being an area in which there is need for tighter controls and
supervision. The Business Plan and Risk Outlook identify a
number of scenarios where conflicts are arising, such as:
• inherent conflicts in structures and business conduct;
• use of in-house funds in wealth management firms; and
• agency responsibility of asset managers.
To manage the conflict of interests theme, the FCA will be
performing ongoing thematic work on the risks arising from
remuneration practices which do not demonstrate a good
balance between reward and the interest of the consumer.
The FCA will continue to review the client assets regime for
investment business and publish new rules to strengthen
existing protections for consumers and enhance the integrity
of UK financial markets.
The way in which firms approach conflicts of interest is likely
to come under scrutiny in the following months. Firms may
wish to review their approach to conflicts, notably processes
and procedures, but also ensure that the register is up to date.
Financial crime and market abuse
“We expect market participants to act as the first line of defence
against market abuse and not to rely solely on us to monitor
financial crime.”
The FCA will be looking at the market abuse controls in place
to ensure that trading activity is consistent with the
expectations of the FCA in terms of market conduct. The FCA
expects a collaborative approach from firms with shared
responsibility for the prevention of abuse and distortion of the
market. Additionally, the FCA will continue to work closely
with the police and other enforcement agencies to tackle
financial crime.
There will be engagement on internal and European policy,
embedding the European regulatory environment such as
AIFMD and implementing MiFID II into the national
regulatory framework.
As well as onboarding new regulation, the FCA will be
conducting a post implementation review of the Retail
Distribution Review.
Next steps
There will be an increase in the use of thematic reviews within
the asset management sector and the processes and controls
around information flows.
Firms may benefit from taking a proactive approach to
managing their relationship with the FCA. This could be done
by considering whether their strategy and operational
infrastructure meets the FCA’s expectations.
The BMSA is an excellent opportunity for firms to
demonstrate to the FCA that they understand what is expected
of them and that their business is aligned to these
It is clear from the Business Plan that the FCA will expect to
see evidence of firms embracing an appropriate culture across
the organisation.
What does this mean for you?
Our asset management regulatory specialists continue to
provide support for firms as they adapt and enhance their
operations in line with regulatory change.
Some of the key questions asset managers should be
considering over the next 12 months are outlined below:
In relation to the prevention and early detection of financial
crime, the FCA will:
• Do you have a BMSA? How does it meet the FCA’s
expectations and is it properly challenged at the Board?
• oversee the suspicious transactions that firms are required
to report;
• How well will your market abuse controls stand scrutiny
when the FCA conducts its thematic review?
• oversee trading venues’ surveillance systems;
• Have you decoupled research commission payments from
trade flows?
• continue to enhance its own surveillance systems;
• take tough action against those who abuse the markets;
• educate firms by means of a newsletter (Market Watch)
and industry panels; and
• look to strengthen and encourage the practice of
whistleblowing within the industry.
In relation to its continued assessment of anti-money
laundering (AML) processes and controls the FCA will
perform focused thematic work, looking at the judgements
being made in relation to money laundering risks and the
firm’s AML culture.
The FCA also intends to look more closely at the processes and
controls in place at smaller firms.
• Are your conflicts registers up to date, and controls
adequately assessed?
• How does your organisation define its culture? Does the
existing culture drive good outcomes for your clients and
how do you demonstrate this?
For more information or to discuss any of the issues covered
above please contact:
Amanda Rowland
Partner, Asset Management Regulatory Practice
E: [email protected]
T: +44 (0) 20 7212 8860
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