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The review focused on two risks that could result in poor outcomes for customers. These were asset managers:
The key findings with respect to each risk are:
Resilience risk
Last year the FCA found that asset managers were largely unprepared for the failure of a service provider undertaking critical activities, as firms’ contingency plans had not considered how to maintain operations and service to their customers. So the regulator wrote to CEOs in December 2012 setting out its expectations of asset managers that outsource critical activities. The FCA is pleased with the level of engagement from asset managers in response to its 'Dear CEO' letter, and during 2013 has started to see improvements in asset managers’ planning for the failure of a service provider.
The FCA is also encouraged by the industry-led work intended to help firms with contingency planning. This work is being driven forward by the Outsourcing Working Group (OWG) which is devising principles to guide the industry, with a key aim of improving portability between providers. In addition to helping mitigate the resilience risk, there could be wider benefits to the industry and their customers if asset managers were able to move service providers more readily.
Oversight risk
The FCA is reassured that all asset managers within the sample had oversight arrangements in place to oversee their service providers. The effectiveness of oversight arrangements varied from firm to firm, with only some asset managers able to demonstrate high standards of oversight consistently across all outsourced activities. Where oversight of an activity was lacking, the FCA found the main cause was insufficient internal expertise to carry out the oversight.
The regulator found that all asset managers taking part in its review had oversight arrangements in place to oversee their service providers, although their effectiveness varied. Where oversight of an activity was lacking, the FCA found the main cause was insufficient internal expertise.
Next steps
In light of the findings, asset managers should:
Speaking at the 2013 FCA Asset Management Conference on shaping the future in asset management, chief executive Martin Wheatley called for greater transparency to boost the reputation of the asset management sector, and a frank and open discussion on how and where dealing commission is spent.
He confirmed that the FCA would be working with the industry to develop a proportionate regulatory solution. The roadmap for change will include:
The FCA’s concerns about transparency are shared by industry practitioners and representatives, including the Investment Management Association (IMA). Speaking in response to Martin Wheatley’s announcement of a review of the use of dealing commissions in the purchase of research, IMA Chief Executive Daniel Godfrey said: “The IMA has been conducting a significant review of this market for some months and we expect to be able to report our conclusions early in the New Year. Our clear objective is to ensure we deliver the greatest possible value for money, transparency and accountability to our customers and we will explore all possible avenues to make sure we do just that.”
The asset management sector includes 2,100 authorised firms, employs more than 29,000 people across the UK, and holds £5.2 trillion assets under management.