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FSA Update: Asset Management
Dan Waters, Asset Management Sector Leader at the FSA has made a speech at the McKinsey Asset Management Conference
The speech identifies some of the key areas of FSA concern at the current time, and which Managers should be conscious of, including:
· Hedge funds jumping on the UCITS bandwagon
· TCF issues and Product development, with particular comment on Absolute Return Strategies
· Commission’s work on Packaged Retail Investment Products
· Retail Distribution Review and Platforms
· AIFM Directive
Of these, we think the comments on TCF and Product Development should be of most interest to Managers at the current time.
Hedge Funds and UCITS
As regards hedge funds, Mr Waters sounds a warning to hedge fund managers, “some of whom are getting on what is beginning to look like a UCITS III bandwagon”. He reminds Managers that: “compliance with the UCITS framework will take considerable investment in systems and controls, and while asset managers may delegate various functions, they retain ultimate responsibility for compliance with the quite detailed requirements of UCITS III and, even more, under UCITS IV. “
The comment would seem to be equally relevant to the providers and clients of the increasingly popular “hosted ACD services”.
TCF and Product Development
Mr Waters speaks of the FSA’s increased focus on governance, design and oversight by provider firms, the need for improved scenario and stress testing of products and the respective responsibilities of product providers and distributors Also, the concern that product design should not be driven by benchmarking against competitor products.
In short, there is not much new in Mr Waters comments compared to the FSA’s TCF publications of 2007 and 2008.
The importance then is that Mr Waters has chosen to make these comments at this time, and firms may be well served in considering their TCF arrangements as regards product development, particularly firms offering absolute return funds, to which Mr Waters makes specific mention.
At the following link you can find a Funds-Axis briefing note on TCF and Product Development for Asset Managers http://www.funds-axis.com/uDocs/Funds-Axis%20TCF%20Briefing.pdf. For funds-Axis training on TCF and Product Development, contact info@funds-axis.com
Mr Waters also refers to the responsibility of product providers to explore and understand their distributors’ information needs and ensure, as far as possible, that distributors are getting the right messages about what particular products do and how they might reasonably be used.
Commission’s work on Packaged Retail Investment Products
Mr Waters provides an update on the European Commission’s work examining the effectiveness of regulation of retail investment products across the banking, insurance and fund sectors, with a particular focus on the rules around selling processes and pre-contractual consumer.
Retail Distribution Review and Platforms
Mr Waters refers to the Retail Distribution Review (RDR.
He acknowledges that a number of the RDR proposals will have a significant effect on the sale and distribution of funds and investment products, in particular that the proposals on adviser charging may rely to some extent on the agreement of the platforms industry to support suitable share classes or otherwise facilitate adviser-agreed remuneration.
While the FSA has previously concluded that their existing principles-based approach was adequate, the subsequent intervention of the RDR solutions and – in particular – concerns expressed by the asset management industry about the implementation of adviser charging has caused the FSA to look again. Going forward, the FSA plan to include in the RDR Policy Statement a chapter which will set out a number of ideas around our future approach to platform services, taking into account the RDR decisions.
This will include an examination of the way in which platform operators are remunerated, the inducements they provide to adviser firms, the provision of data on product sales and the levels of adviser charging, and the use of platforms by independent advisers.
AIFM Directive
Mr. Waters comment on the AIFM are interesting in that they consider the investor perspective and the risk that investors may not be able to access substitute products if a significant number of existing funds were no longer available to them if they do not have the access to the ‘best in class’ funds from across the globe that they currently do. This could force them to hold sub-optimal portfolios with resulting implications for investment returns and risk management.
The FSA commissioned Charles River Associates (CRA) to carry out an independent impact assessment of the Directive, which estimated that up to 40% of hedge funds and 35% of private equity funds could no longer be available to EU investors.
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