With the UK looking to update its asset management regime post-Brexit, the Financial Conduct Authority (FCA) has published a discussion paper containing a number of proposals. Although the FCA has stressed that not all of these suggestions will be implemented, asset managers should still be taking note of the contents – and assessing how they could impact their operations moving forward.
At a high-level, the FCA discussion paper asks the industry whether there should be consolidation of some of the rules which apply to asset managers, including UCITS, MiFID (Markets in Financial Instruments Directive) and AIFMD (Alternative Investment Fund Managers Directive)- a move that could potentially root out a lot of the duplication facing firms. Elsewhere, the FCA has indicated it is open to changing the size threshold by which AIFMs are subject to the full scope of AIFMD. In addition to simplifying existing regulations, the FCA is also looking to strengthen and modernise fund operations. Some of these moves would also mean a replacement of regulatory rules put in place while the UK was part of the EU.
So what exactly is happening?
Following the market turbulence unleashed by the LDI (Liability Driven Investment) episode in Autumn 2022, the FCA is debating if rules should be implemented requiring portfolio managers to assess whether or not they pose a systemic risk. Although this idea remains very much in its infancy, portfolio managers should brace themselves for potential changes here, which could require them to gather more information about their exposures, and make a judgement on whether they constitute a systemic risk.
The paper hints the FCA is keen to tighten ESMA’s (European Securities and Markets Authority) provisions on liquidity stress testing and reporting. According to Linklaters: “The FCA plans to convert the liquidity stress testing guidelines issued by ESMA into rules and guidance in its Handbook. It is also considering removing or significantly restricting the limitation around liquidity stress testing, so that the qualification ‘where appropriate’ does not give fund managers a reason not to carry out stress tests. The FCA is also considering whether to extend the reporting of liquidity categories/buckets received for AIFs to UCITS funds, and to see if there is any benefit in requiring funds to make any form of public disclosures on liquidity of investments.” These provisions, should they be enacted, could force fund managers to obtain more granular data about their underlying liquidity.
On innovation, the FCA talks positively about the concept of fund tokenisation, but it also wants to use technology as a means to improve investor engagement. For instance, the FCA noted that fund prospectuses and client reporting tends to be rather underwhelming, and asks whether technology could help redress some of these deficiencies. It also poses the question as to whether technology could improve investor participation at unitholder meetings.
It is clear that the FCA expects fund managers, many of whom are still reliant on legacy technology to some degree, to modernise their internal systems and operations. Firms which leverage best-in-class OMS (order management systems) and PMS (portfolio management systems) tools will be in a strong position to navigate these changes as and when they are implemented. Alongside our premier OMS/PMS solution, a robust and efficient data management solution ensures transparency and fluid internal and external reporting for positions and associated risk metrics; an essential tool in today’s market.
