The FCA’s new discussion paper (DP) “Updating and improving the UK regime for asset management”, released this week, states “We recognise our regime cannot stand still. Technology has driven substantial change in the asset management industry in recent years and will continue to do so. For example, innovations such as the tokenisation of fund units might have the potential to transform how funds work.”

The UK is the second largest centre globally for asset management, and therefore holds an important role in the global economy. A large part of keeping this role is developing the Future Regulatory Framework (FRF) to enable better use of technology to manage the entirety of the sector on a more granular level. This begins with the Treasury, then filters down to the FCA and PRA who will in turn manage regulated entities own requirements. The framework that individual funds put in place now will support changes as they come into effect, with the government making clear they will support technology innovation and embrace the use of new technologies. Most funds are not in a position to be expected to manage these technology changes themselves and will work with a third party vendor to support building a fit for purpose framework.

Monitoring framework for own funds and assets

The FCA has observed, for example, that many firms lack an appropriate framework to monitor either solvency or liquidity or both. This is a key to investor protection and some funds are lacking structure to manage this effectively. The FCA hints it 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. Some simply do not have the data strategy and reporting in place to achieve this requirement, should it be set.

Boards and governing bodies

Some firms have embraced the requirement for their Board and Executive members to be a detailed understanding of the firm’s activities, operations, risks and controls. But some still rely on one person or a small group owning the responsibility, leading to key person risk. Not for the first time inaccurate or incomplete data in regulatory submissions was observed recently by the FCA, which it perceives as indicative of weak systems and controls. “We observed some firms providing inaccurate or incomplete data in their regulatory submissions. We consider the poor quality of regulatory data submissions to be an indicator of weaknesses in firms’ systems and controls.” Part of senior managers’ responsibilities under SM&CR require the quality of the data to be at a certain standard. The FCA would like all firms to view the transition to the FRF as an opportunity to update and improve their regulatory reporting strategies. Comprehensive and accurate data allows the firm and regulator to see the firm’s activities clearly. The FCA has a duty to monitor data and the firm has a duty to ensure that data is accurate, forthcoming and appropriate.

Third party vendors not only bring knowledge and expertise to help funds unpick the expectations of the regulator at a granular level, but they are also best placed to understand new technologies and where investment will bring the most value while also negating key person risk and supporting leadership teams with their SM&CR requirements.