Two of the Financial Conduct Authority’s (FCA) recent publications, their 2018/19 Business Plan and Asset Management Market Survey (and the subsequent related Consultation and Policy Statements), provide asset managers with a clear indication of the regulator’s expectations for Governance, Risk and Compliance (GRC) Training Programs for 2018/19. In this article, we focus on FCA’s culture, conduct, and governance-related priorities for the asset management sector and how they can be translated into training and learning priorities for firms.
In their Business Plan, the FCA’s cross-sectorial priorities include financial crime, data security and resilience, and the ongoing fair treatment of customers. This includes continued work on MiFID II implementation. All of these cross-sectorial priorities are underpinned by a continued focus on culture, conduct, and governance.
The FCA makes it clear that they do not see it as their role to measure and assess culture directly. Instead, they continue to look for behavioral drivers within firms and at whether they drive the right behaviors in practice i.e. conduct that is unlikely to cause harm. They refer to remuneration practices and whistleblowing cases as two tools open to them in this area.
GRC Training Programs in the Asset Management Sector
The asset management-specific priorities in the Business Plan are closely tied to the results of their Asset Management Market Survey. In the Asset Management Market Survey, the FCA focuses on the extension of the Senior Manager and Certification Regime (SMCR) to the asset management sector and the implications for culture and governance. Here, the experience of the banking sector provides a clear steer that effective implementation of the new regime takes time and that an early start is therefore essential.
The SMCR is more than an upgrade of the current Approved Persons regime. It requires a different mindset and considerable changes to governance frameworks, employee assessment, and breach reporting infrastructures, employee training and, as a consequence, behaviors right across the firm.
One of the overarching aims of the SMCR is to reduce harm to consumers/investors by increasing Senior Manager accountability. Central to delivering this aim, is the list of Prescribed Responsibilities to be allocated to named Senior Managers and for which they will be personally accountable to the regulator. For the asset manager sector, the FCA is proposing to include in this list a specific Prescribed Responsibility for ensuring compliance with the duty to act in the best interests of investors (see further below).
It looks as if this Prescribed Responsibility will be reserved for the chair of the board, thereby providing a powerful, individual incentive for the chair to ensure the duty is properly discharged.
The FCA and Asset Manager Sector Training
The strengthening of the governance framework of asset management firms will also be promoted by a new FCA requirement for their boards to include at least two Independent Directors (minimum of two).
This change is designed to address the concern that many asset management firms are made up solely of executives of the firm. Although the implementation date for the change has been extended to 30 September 2019, it will be important for firms to ensure that these new board appointments are included in the Responsibility Mapping exercise and properly trained on their responsibilities under the SMCR.
The FCA also uses the opportunity of the Market Survey to discuss the meaning of the duty to act in the best interest of investors. They explain that the duty includes assessing and justifying to their investors the charges taken from the funds they manage in the context of the overall service and value provided.
The FCA refers to the special status of asset managers as agents of the investors in their funds, a status that distinguishes them from pure product providers. In Policy Statement 18/8, the FCA clarifies that the meaning of ‘value’ here is not limited to costs, but rather includes in its scope the full value proposition of the fund.
As a result, the FCA’s final rules in this area include the phrase ‘overall value delivered’ rather than the narrower phrase ‘value for money’. The implementation period for this change has also been extended to 30 September 2019 to allow firms time to adapt to the new standard.
GRC Training Topics for 2018/19
The diagram below links together FCA’s conduct, culture, and governance-related priorities to a proposed list of GRC training topics that could be used to populate or benchmark GRC Training programs for asset managers.
