The future regulatory landscape for Asset Managers is uncertain: what impact will this have on our compliance teams?

Updated 01 November 2019

In June 2019, we reported on the uncertainties that UK Compliance teams within Asset Managers are facing, as the Financial Conduct Authorities (FCA) reported saying that post-Brexit teams may face a “lower burden” approach to financial regulation.

Six months on, this uncertainty is amplified as Brexit is delayed again, a general election is on the horizon, and we witnessed the collapse of Neil Woodford’s investment empire. Back in June the LF Woodford Equity Income Fund was suspended and today it is in liquidation and formal investigations are underway. For now, it is the retail investors that have been the main victims. Regulation change is still afoot, and this will impact Compliance teams in Asset Managers. 

Original article posted 26 June 2019

Compliance teams in Asset Managers, already grappling with the changes their teams may face in a “lower burden” approach to financial regulation post-Brexit, have now been hit with a new wave of unpredictable regulatory ground following Neil Woodford’s funds scandal.

The Financial Conduct Authority (FCA) is widely reported to have said that the UK’s exit from the EU would mark regulatory reform. Mr Bailey, Head of the FCA has said that UK policies would return to a more flexible, principals and outcomes-based system focusing “less on detailed rules that can tend to become overly set in stone” as has often been the way as part of the EU. This will hopefully help address calls for Britain to become more competitive globally but this can only be achieved alongside the critical need to demonstrate the highest levels of regulatory conduct.

When the FCA addresses the future of financial regulation as one of its priorities next year, this obviously won’t lead to the disbandment of existing compliance teams. In fact, it will be critical to show that the changes don’t mean a return to the pre-financial crisis ‘light touch’ and with the eyes of the world upon us, it will be crucial that new approaches protect the integrity of the UK’s financial services.

The pressure for the FCA to prove the upmost competence and security will be particularly prevalent in the funds sector following the recent highly publicised and scrutinised issues with Neil Woodford’s and H2O’s Asset Management funds.Woodford’s risky and complex strategy of “daily redemptions, coupled with illiquidity, coupled with this 10 per cent rule” (on Guernsey’s stock exchange), evaded the protection of Link Fund Solutions, the authorised corporate director (ACD) responsible for ensuring the fund stuck to the rules.

As concerns were raised, more and more investors sought to withdraw, causing the fund to be suspended, freezing £3.7bn of investor’s money and sending shockwaves through the UK’s finance industry. The ACD failed in their sole purpose of protecting investors, indicating flaws in this defensive measure.

This has led the chief executive of the FCA, Andrew Bailey, to face scrutiny at the Treasury select committee. Bailey acknowledged that Woodford’s work was “regulatory arbitrage” and “sailing close to the wind” but argued that this failing was a result of a failure of the rules, not the FCA’s supervision.

He stated that there had only been two funds out of 3000 in the past year that had breached rules on holding unlisted assets but this was very quickly followed by the announcement of further troubles with other funds. Six of H2O Asset Management’s funds have now seen their combined assets fall by €5bn as concerns were raised over links to a controversial German financier.

How this all plays out for our UK and European regulators remains to be seen but solutions are already being put forward. The FCA’s new requirement to have at least a quarter of independent directors on the board to add another layer of oversight can’t come soon enough.

What has become very apparent is that the FCA, other regulators and subsequently financial services firms need to be taking these issues seriously at senior management level, so that they’re on the front foot. We are starting to see the emergence of compliance functions being moved to the front line and predict that the future in this brave new world will see compliance more intrinsically immersed as a ‘way of working’ as opposed to a singular department.

Change is afoot, there is no doubt but doing things differently doesn’t mean doing less. The FCA wants to pursue a “same outcome, lower burden” approach and this will demand lots of compliance input.

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