Speech by Ashley Alder, Chair, delivered at the Bloomberg Buy-side Forum.
Speaker: Ashley Alder, FCA Chair
Event: Bloomberg Buy-side Forum
Delivered: 22 May 2024
Note: this is the speech as drafted and may differ from the delivered version
Good morning.
Today I’ll take the next 15 minutes or so to talk about our agenda for the asset management sector.
A good understanding of our approach is particularly important at a time where the relationship between regulation and our new secondary competitiveness and growth objective has attracted a lot of interest.
Regulation exists to enhance trust and confidence in our financial markets which is essential for a thriving, competitive financial services industry. We do, however, recognise that the way in which we design our rules to achieve this basic outcome can be the subject of different views.
Design choices have taken on far greater significance given that we are now able to review assimilated EU law. We’re working hard to ensure that feedback from all stakeholders, including input from the soon-to-be established Cost Benefit Analysis (CBA) Panel, will inform approaches to rule making to underpin the healthy development of UK financial services for years to come.
Nowhere is this more important than when designing regulation for the asset management sector. Buy-side firms play a vital role in securing the financial wellbeing of millions of people whilst making decisions that are essential to capital formation in the interests of the wider UK economy.
In this context, many of you will be aware that the FCA is pursuing a set of landmark proposals to enhance UK capital markets, ranging from listing rules and research, to affordable mass-market investment advice and value for money in pension schemes.
But today I’ll focus on regulation of direct relevance to the asset management industry, where the statistics speak for themselves. UK asset managers are now responsible for £11 trillion of mainstream assets and £2 trillion of alternative assets.
It’s also an industry which operates globally, with many UK firms operating as parts of asset management groups serving clients overseas.
We know, however, that despite the continued strength of the sector, the environment in which asset managers operate has been subject to uncertainty and market shocks, and we have seen firms face challenges in raising and maintaining assets.
We’ve also seen the sector respond to these challenges with cost cutting and consolidation, with some deciding to branch out into new lines of business.
We of course want the sector to thrive. So we are using the opportunities presented by the Smarter Regulatory Framework (SRF) to modernise and enhance asset management regulation to meet the needs of the UK market.
We also want our rules to interact effectively with the requirements that firms are subject to in other jurisdictions, recognising the truly global nature of the industry.
Smarter Regulatory Framework
As you know much of asset management regulation is contained in assimilated EU law through an alphabet soup of UCITS, AIFMD and some parts of MIFID, where we are working through a process of repeal and replacement.
Last year we published a Discussion Paper which set out our initial ideas for reform.
It will probably come as no surprise that respondents indicated they wanted us to remain broadly aligned with EU rules, and that was especially true for retail funds, where the undertakings for collective investment in transferable securities (UCITS) framework is seen to offer an established, generally applicable baseline.
However, some saw considerable benefit in making the regime far more proportionate for alternative managers, and we agree this is where there is the greatest potential for reform.
The Alternative Investment Fund Managers Directive (AIFMD) regime was developed mostly for funds with professional investors. But in practice it covers a broad range of fund management including hedge funds and private equity firms, but also some retail funds and managers of investment trusts.
We want to set clear and coherent requirements proportionate to the risks posed by specific business models, recognising that institutional investors have different abilities to manage those risks for themselves.
We of course want the UK regime to continue to support high standards and to be interoperable internationally. And we fully recognise the importance of stability, predictability and proportionality, and will only pursue reform where there are clear benefits of doing so.
Private finance, NBFI and valuations
Whist we work on streamlining the requirements for alternative funds, it is critical that there is sufficient confidence in the quality of an asset management sector where a vast array of different business models straddle both public and private markets.
The term ‘Non-Bank Financial Intermediation’, or NBFI, is used to describe everything from private equity to hedge funds and other sources of non-bank finance.
The level of risk involved really depends on what part of the NBFI sector we are referring to, but a common theme is that regulators need to think about what tools and data they need to oversee these activities more effectively, as well as the private markets in which many of them participate. NBFI regulation should be a global effort to improve the data needed to enable regulators to spot risks in these markets and supervise them credibly.
Whatever terminology is used, these markets matter. Global private finance is experiencing rapid expansion, with annualised growth of nearly 18% since 2017 and private market assets under management reaching US$12.8 trillion by 2022.
As many of you know, we are looking at private markets both on a global and domestic level. Harms can occur due to inherent conflicts, with the potential for incentives to adversely affect approaches to valuations.
While values are ultimately crystallised on exit, there is the potential for inflated values to support borrowing, avoid covenant breaches, and support fund performance and therefore fundraising. Where liquidity is provided to investors this can also result in unfair redemption prices.
These risks cut across all FCA objectives, and it is for this reason we are undertaking domestic supervisory work in relation to valuations. We also co-lead an important workstream on leverage in the non-banking sector for the global Financial Stability Board (FSB).
There are also separate questions about how this translates into risks in fund structures, especially open-ended structures. Much work has been done on this through the FSB and the International Organization of Securities Commissions (IOSCO), and it was good to see consensus reached last year on liquidity management, with a clear position that illiquid assets should not be held in daily dealing structures.
Retail investments
Moving from wholesale to retail markets, it would be remiss of me not to talk about packaged retail and insurance-based investment products (PRIIPs).
We certainly welcome a revocation of the PRIIPs regulation, which has resulted in some instances of cost disclosure not reflecting the true costs of an investment. We want to ensure that any replacement regime gives investors sufficient and meaningful information to inform their decision making.
We look forward to consulting on a new regime that is proportionate and tailored to the market and products here in the UK, and which allows firms to design a more engaging consumer journey.
Together with our work on the advice-guidance boundary, we think that this has the potential to fundamentally re-set how consumers engage with financial products.
Sustainability disclosure requirements (SDR)
Now a word about environmental, social and governance (ESG) disclosures.
Investors want to put their money to good use – our research shows over 80% of consumers want their money to do good, as well as deliver a return. The UK’s new disclosure and labelling regime is all about creating a system which supports confident investing for those who want to do right for the people and the planet. It's also about consumers knowing that controls are in place to ensure that firms’ sustainability claims are true.
We recognise that many firms are subject to global sustainability disclosure requirements, especially in the EU. So, at every stage of forming our new rules we have sought to create international interoperability.
We’re continuing to work with other jurisdictions to demonstrate that it is possible to introduce rules that protect consumers but also help the market to grow.
Encouraging international consistency is at the forefront of our discussions, so we’ll continue to engage with our international counterparts as they develop similar rules, as well as continuing to engage with HM Treasury (HMT) as it considers extending the disclosure and labelling regime to overseas funds.
Ultimately, we want to see a level playing field for all firms operating across the UK market to maximise the benefits of the regime for consumers. We aim for all schemes that are marketed to UK investors to be subject to the same requirements.
Innovation
Our discussion paper also touched on the opportunities presented by technology.
One special area of focus for us has been on fund tokenisation. Asset managers continue to explore commercial uses for fund tokenisation and there is growing industry interest in the benefits of this technology.
We are observers on the industry-led Technology Working Group of the government’s Asset Management Taskforce, which is considering how to implement tokenisaton in the UK.
The Working Group published its interim report in November last year, which set out how firms can develop models within existing legal and regulatory frameworks.
While the report covering the first phrase did not identify any obvious or significant barriers to adoption in FCA rules, we wrote to firms to set out our own view to help them develop their own models. Further developments, as were set out in the group’s second report, are of course more complex. We will therefore keep our Handbook under review for any changes that may be required to keep pace with this initiative.
Conclusion
As I mentioned at the outset, all this work comes amid a debate about the UK competitiveness, and our role as an organisation having been given a secondary objective to facilitate the international competitiveness and growth of the UK economy.
At every point in our decision-making process, we consider the options that could advance our primary operational objectives and weigh up which of them could advance growth and competitiveness.
You can’t grow sustainably without stable markets, and effective competition which raises quality, drives down prices and prompts innovation. Better outcomes for all consumers are good for growth.
I don’t have enough time now to cover our decision last year to enable greater retail access to long-term asset funds (LTAFs) or how we and HMT are implementing the important Overseas Funds Regime.
Suffice to say that each of these are part of our overall aim to ensure that the asset management sector continues to thrive and grow, delivering for the end consumer and the UK economy as a whole.