On 12 October 2023, the FCA published a speech delivered by its Chair, Ashley Alder, at the Investment Association’s Annual Dinner on 11 October. In the speech, Mr Alder provides an update on the FCA’s priorities for updating and improving the UK asset management regime in light of the responses it received to discussion paper DP23/2, which was published in February.
Mr Alder notes that DP23/2 was written in anticipation of the Financial Services and Markets Act 2023, which received Royal Assent in June this year and which embeds the FCA’s new competitiveness objective. He confirms that DP23/2 attracted intense interest across the industry, as it was intended to do. He also highlights the importance of proportional regulation in driving long-term competitiveness, and states that this, together with ways in which regulation can drive innovation, lies behind much of the FCA’s thinking about investment management.
In the speech, Mr Alder emphasises that the FCA fully appreciates the importance of the investment management industry for the UK as an international financial centre and for the UK economy, although it is also alive to the headwinds which challenge many firms, and its core objective is to pursue reforms which do their part to strengthen the industry over the years to come.
FCA priorities for asset management
Not all of the ideas raised by the FCA in DP23/2 will be taken forward. Proposals not being pursued include consolidating the rules for different types of asset managers and developing a category of basic authorised funds to help retail investors navigate the market. This follows feedback that simplifying the FCA Handbook, with which firms are very familiar, should come after targeted reforms intended to make a tangible, positive difference to the environment in which asset managers and investors operate.
The FCA’s three main priorities for reform are:
- Making the regime for alternative fund managers more proportionate.
- Updating the regime for retail funds.
- Supporting technological innovation.
The regime for alternative fund managers
There were calls from the industry to retain the core framework of the Alternative Investment Fund Managers Directive (AIFMD), while making it more proportionate in some areas and more tailored to the UK market. Many pointed to practical issues caused by the full AIFMD regime only applying to firms above a threshold of assets under management.
Instead, the FCA proposes to use a set of consistent rules across all managers of alternative funds, rather than having two different categories of manager and applying different rules to each, with the aim of ensuring the regime operates proportionately depending on the nature and scale of a firm’s business. It will work with HM Treasury to explore how to make regulation work “far better” for small registered, small authorised and full scope managers.
Also in response to feedback, the FCA is considering changes to address the complexities caused by AIFMD preventing full-scope alternative fund managers from carrying out other activities within the same legal entity.
It is also considering whether changes could be made to ease some of regulatory burden on managers under AIFMD, on the basis that the cost of compliance may not be proportionate to the benefits of this type of reporting. (The AIFMD currently requires managers to report to regulators when a fund is newly established, when there are any material changes to a fund, when there is an acquisition or disposal of major holdings and in relation to the control of non-listed companies.)
Updating the regime for retail funds
The FCA considered feedback about the way in which some funds are regulated like alternative investment funds, where in principle only retail rules should apply. Mr Alder notes that this pointed to a far clearer distinction between the requirements applied to managers of authorised retail funds and managers of alternative investment funds – the result should simplify the retail rules for non-undertaking for collective investment in transferable securities (UCITS) funds.
The possibility of rebranding non-UCITS funds to help rationalise the regime, and if so how best to do this, is another area the FCA is exploring following feedback received. Mr Alder said further dialogue on branding options would be welcomed.
Supporting technological innovation
DP23/2 touched on how fund managers might adopt distributed ledger technology (DLT) to offer fully digitised funds to the public. Since then, the FCA has been working with the Technology Working Group, which sits under HM Treasury’s Asset Management Taskforce, on a blueprint for fund tokenisation which is expected to be published later in 2023.
The FCA has also held a tech-sprint with the industry to test policy initiatives and the rule changes needed to support work on fund tokenisation.
Mr Alder notes that the FCA is building in extra capacity to support innovation as it sets out its plans for regulatory reform, including more work on other initiatives such as the Direct2Fund proposal which it says could make the UK fund dealing model and interactions with investors far more efficient.
He also explains that the FCA is seeking to achieve a regime that sets and tests high standards and that interacts effectively with the requirements firms are subject to in other jurisdictions, whilst also rationalising unnecessarily complex regulation that can create barriers to entry and impede effective competition.
Mr Alder assures firms that the FCA is aware of the potential for “policy overload” given the volume of broader reform proposals, as the it works to make its own rules to replace retained EU law. He also notes that the FCA is aware of the challenges facing many globally active firms that need to comply with requirements in multiple jurisdictions, and says he is “keen that there is sensible – and proportionate – sequencing and management of such an intensive multi-year reform agenda”.
Productive investment in the UK
In his speech, Mr Alder also discusses the wider debate about ways to mobilise domestic savings to fund productive investment in the UK, which he notes is the broader context in which the FCA’s thinking about asset management sits. The Chancellor’s Mansion House reforms (announced in July) are a part of this, aiming to funnel more money from UK pension funds into promising UK growth companies. This includes a value for money framework for DC pension funds which should drive better outcomes for members, enable better investment choices and may incentivise scheme consolidation – the FCA is partnering with the Pensions Regulator and the government on this.
Mr Alder also refers to the need for people to get the help they need to make effective decisions, understanding the risks they are taking and the regulatory protections involved. The FCA’s joint review with HM Treasury of the advice and guidance boundary seeks to address this. In doing this, the FCA hopes to see a greater proportion of domestic retail savings flowing to UK productive assets.
The FCA plans to consult on amending the AIFMD regime and re-evaluating the AIFMD rules for non-UCITS retail funds in 2024, and to review the regulatory reporting regime in 2025.