UK Asset Managers: The FCA Aren’t Just Saying “Jump!”, They’ve Also Told You How High

In November last year we wrote extensively on Citibank's record fine from the UK financial regulator and warned that the “default pre-crisis approach to financial regulation at many firms has been to view each new rule as a box-ticking exercise. With this hefty fine, the PRA is emphasising that, in the new world, financial services need to heed both ‘the letter and the spirit’ of regulations”.

The FCA doubled down on this messaging in their recent letter to Asset Management CEOs, warning that “harm” is being caused to the customers they represent by the sector’s “overall standards of governance”, which the FCA says falls well “below their expectations”. This is only going to bring more regulatory scrutiny to a sector already feeling the heat of the spotlight post Woodford.

“Effective governance is critical to the success of your firm in delivering long-term returns for investors.”

~ Financial Conduct Authority

What now?

The letter makes clear asset management firms across the UK need to reassess their approach to the FCA’s supervisory priorities, and they need to do so now. They must think harder and smarter about what current regulation means for the way they make decisions and safeguard consumers, and the regulator is assessing how well they’re doing during “the first half of 2020”.

The letter issues clear guidance on what boards, senior leadership, and governance teams at UK investment firms should be doing; not only demonstrating better governance to the regulators, but actually implementing three key changes:

1. Ensuring their boards “engage in robust discussion and challenge around important business decisions”.
2. “Mitigat[ing] harm arising from any conflicts of interest between affiliates”.
3. Re-evaluating their “approach to governance […] improv[ing] it in line with SMCR requirements”.

“The SMCR should not be treated as a discrete compliance project; rather, it is an opportunity to deliver high standards of governance”

~ Financial Conduct Authority

How can you ensure compliance?

Each business has its nuances — products, people, and culture — but all good businesses have one thing in common: good governance, which allows them to deliver long-term returns for investors.

In our experience working with SMCR across the financial services sector, we’ve long argued a best-practice framework to meet these standards should be based around 5 key pillars, “actively managed” and reviewed as per the regulator’s recommendations.

Our “5 pillars of SMCR” framework and recommendations can be mapped neatly onto the FCA’s concerns and required actions (below) — clearly spelled out in their letter.

• Pillar 1: “Inadequate investment in technology and operational resilience has led to deficient systems”.
• Pillar 2: “Lines of accountability and responsibility for senior management functions (SMFs) must be clear”.
• Pillar 3: “You should ensure that the boards of your regulated entities engage in robust discussion and challenge around important business decisions”.
• Pillar 4: “We expect you to have refreshed your approach to governance and taken the necessary steps to improve it in line with SMCR requirements”.
• Pillar 5: “The SMCR should not be treated as a discrete compliance project; rather, it is an opportunity to deliver high standards of governance”.

To reach the regulator’s expected standard, your organisation must not only put the framework in place, but also embed and scale it from the very top to the bottom of your business, and, crucially, ensure it demonstrably changes the way you do business.

What next?

The FCA have quite clearly stated they’ll carry out work in the first half of 2020 to evaluate the effectiveness of governance across the asset management sector. With the Citi fine proving the regulator will act, time is running out for firms to demonstrate their efforts to implement SMCR.