Financial institutions
In this chapter of our Annual Insurance Review 2019, we look at the main developments in 2018 and expected issues in 2019 for financial institutions.
Key developments in 2018
During the year, the Financial Conduct Authority (FCA) has been actively progressing its programme for reforming the asset management industry.
The measures previewed in its June 2017 report include imposing a general duty on fund managers to demonstrate they are acting in the best interests of investors, to report on the value for money they provide and to identify measures to remedy any failures in this regard. Individuals will be personally held to account for any non-compliance with these duties under the Senior Managers and Certification Regime (SMCR), as further explained below.
Policy statements and consultation papers published this year by the FCA have addressed a variety of measures, including: requiring fund managers to assess annually whether their charges are justified; improving the transparency of charges via an “all-in fee”; requiring funds to explain their investment strategies and objectives more clearly to investors; and enabling investors to better compare different funds and monitor performance.
The challenge for the asset management industry is to respond positively to these measures and demonstrate that it is delivering value for money (remedying any value-for-money issues), but without signposting potential issues for investors in relation to past activity. It will need to work with the FCA to provide the required level of clarity on investment strategies, fund objectives and performance targets in its investment reports.
What to look out for in 2019
The SMCR represents a paradigm shift in the UK financial services industry. From next year, this new regime will apply to every FCA-regulated firm, imposing personal accountability on almost all personnel working in the regulated financial services sector.
This is part of a concerted drive by the FCA to improve the culture of financial services, to avoid future financial scandals and to ensure accountability for risk management, compliance and wrongdoing from the top down.
The SMCR therefore demands that all financial services personnel conduct themselves responsibly, since they will be held individually, personally and directly accountable.
The new Conduct Rules will set out a minimum basic standard of conduct and behaviour applicable to all financial services personnel. The key requirements are that all staff act with integrity, due care, skill and diligence, co-operate with regulators, pay due regard to the interests of customers and treat them fairly, and observe proper standards of market conduct.
Senior managers will have additional responsibilities to ensure effective control of the business, compliance with regulatory standards and appropriate delegation of responsibilities. If a firm breaches an FCA requirement, the senior manager responsible for that area can be held directly accountable if they did not take reasonable steps to prevent the breach.
The SMCR implementation date is 9 December 2019 for most financial services firms. Before then, firms must have identified all senior managers and certified persons, and trained them on the Conduct Rules.
Looking ahead, we expect to see a continuing increase in FCA enforcement investigations focusing on senior management responsibility, reflecting the more aggressive and proactive approach signalled in public statements by FCA enforcement director Mark Steward and FCA policy papers issued this year.
Authored by Marcus Knight.
Download our full Annual Insurance Review 2019 for more insights.