On 18 February 2020, the FCA published its annual Sector Views analysis (https://www.fca.org.uk/publication/corporate/sector-views-2020.pdf), which sets out its view of areas of risk and potential harm to consumers in the financial markets. The analysis covers all financial sectors, but the comments made in relation to investment management are of particular interest. The FCA highlighted its concerns in relation to:
- Pricing and quality of investment products
The FCA has observed weak price competition, with no clear relationship between charges and performance and a lack of transparency and clarity on pricing and quality.
- Operational resilience/cybercrime
This can cause financial or data loss to investors and potentially damage market integrity. Poor governance and oversight of outsourced functions and a lack of contingency plans for service disruptions needs to be addressed.
- Disorderly markets
The FCA has identified a potential source of disorderly markets being the liquidity mismatch of daily dealt funds that invest in less liquid assets. The FCA has set out policy changes for illiquid assets and open ended funds and is considering whether there should be tighter rules on liquidity management. The FCA has also said that poor risk management of leveraged strategies (particularly at alternative fund managers) and disorderly transition from LIBOR could also create disorderly markets.
- Market abuse
Performance fees in the asset management sector are identified as creating a potential incentive for market abuse. Innovative technologies and investment strategies used by asset management funds can also increase risk in this area.
- Pricing and quality of institutional intermediary and advice services
The FCA has expressed concerns about competition in this market not being effective. The FCA referred investment consultants and fiduciary managers to the Competition and Markets Authority which led to requirements for them to take action to improve competition.
- Pricing and quality of custody and investment administration services.
The FCA is concerned that firms have weak CASS controls and governance, weak depositary oversight of authorized fund managers and operational resilience.
The FCA's regulatory focus remains on promoting the fair treatment of customers and good value by improving transparency, comparability, accountability and investor protection. Firms should consider themselves on notice of the FCAs concerns, and seek to actively address these areas.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA and interim Chief Executive designate, said: ‘We are committed to reducing harm in the markets we regulate. Our analysis of markets ensures that we do this effectively, helping us to decide where to focus our attention. We expect firms to be similarly focused on preventing harm and assisting us where they can, and we will continue to actively supervise all firms to ensure they achieve this.