Speech by Ashley Alder, Chair, delivered at the Investment Association’s Annual Dinner.
Speaker: Ashley Alder, Chair
Event: Investment Association’s Annual Dinner
Delivered: 11 October 2023
Note: This is a drafted speech and may differ from the delivered version
- Proportional regulation, together with ways in which regulation can drive innovation, lies behind much of our thinking about investment management.
- Following our asset management discussion paper, we will be pursuing three main priorities for reform: making the regime for alternative fund managers more proportionate; updating the regime for retail funds; and supporting technological innovation.
- We recognise the role the sector has to play in mobilising domestic savings to fund productive investment in the UK. The FCA is also pursuing reforms to promote the medium to long-term growth of the UK economy.
I’d like to begin by thanking you for your contributions to our Discussion Paper on Updating and Improving the UK regime for asset management.
The paper was written in anticipation of June’s Financial Markets and Services Act, which of course embeds the new competitiveness objective. The paper did – and was meant to – attract intense interest across the industry.
And although the new Act is extremely wide ranging, there is no doubt that a focus on competitiveness is an important step change. It builds on how we have thought about our role for some time, and which successive governments have asked us to consider through their remit letters.
A proportionate approach
Although the new objective is secondary to those on consumer protection, market integrity and competition, which must take primacy, it requires us to think deeply about how our work can drive long-term competitiveness. And at the risk of front running what I’m about to say on our specific plans for investment management, I believe that a great deal revolves around the word 'proportionality'.
This word means different things to different people. In my view it’s to do with proportionality in relation to firm size – from the very large to the very small – and proportionality in relation to a firm’s customers – whether retail or wholesale. Each of these characteristics – size of firm and customer base - will of course interact in different ways. But I think that a conceptual framework along these lines should influence how regulation operates when assessing how to tackle risks of harm without imposing unnecessary burdens on firms.
So, proportional regulation, together with ways in which regulation can drive innovation, lies behind much of our thinking about investment management. In discussions with a range of stakeholders it’s actually been hard to nail down the specifics of how conduct regulation can drive international competitiveness and growth. But, I think a smarter approach to proportionality, whilst always maintaining high standards, is closely related to competitiveness.
Before moving on, a word about the broader reform programme where the FCA will make its own rules to replace retained EU law. It’s hard to overstate the significance of this rule making for the UK, not least because it’s here where many of our proposals for asset management will be made real.
By way of some assurance, we are aware of the potential for firms (and the FCA) to suffer policy overload given the sheer volume of reform proposals. We are also aware of the challenges facing many globally active firms who need to comply with requirements in multiple jurisdictions. I’ve made very clear on other occasions that our evolving rulebook is bound to differ from EU regulations, but that we won’t be pursing change just for the sake of it. So, I’m keen that there is sensible – and proportionate - sequencing and management of such an intensive multi-year reform agenda.
Our priorities for asset management
So, back to our future plans for asset management in light of the very useful feedback to our February Discussion Paper.
As you would expect, we won’t be taking forward some ideas. Among these was a suggestion to consolidate the rules for different types of asset managers, as well as a thought that we might develop a category of basic authorised funds to help retail investors navigate the market.
Many of you saw benefits if we were to pursue these proposals, but argued that they shouldn’t be a priority. Simplifying our Handbook, with which firms are very familiar, should come after targeted reforms intended to make a tangible, positive difference to the environment in which asset managers and investors operate.
So, feedback made it clear that there are three main priorities for reform. They are simple in concept:
• First, making the regime for alternative fund managers more proportionate.
• Second, updating the regime for retail funds, and
• Third, supporting technological innovation.
So, I’ll say a few words about each of these.
The regime for alternative fund managers
For alternatives, we heard calls from the industry to retain the core framework of the Alternative Investment Fund Managers Directive (AIFMD), while making it more proportionate in some areas, and more tailored to the UK market. Many pointed to practical issues caused by the full AIFMD regime only applying to firms above a threshold of assets under management.
Instead, we would like to use a set of consistent rules across all managers of alternative funds. Rather than having two different categories of manager and applying different rules to each, we would ensure the regime operates proportionately depending on the nature and scale of a firm’s business. So, we will work with the Treasury to explore how to make regulation work far better for small registered, small authorised and full scope managers.
Respondents also highlighted that AIFMD prevents full-scope alternative fund managers from carrying out other activities within the same legal entity. Given the complexities this can result in, we are also considering modifications in this area.
As to regulatory burdens, AIFMD currently requires managers to report to regulators when a fund is newly established, when there are any material changes to a fund, when there’s an acquisition or disposal of major holdings and in relation to the control of non-listed companies.
We are considering if changes could be made to ease some of these requirements on the basis that the cost of compliance may not be proportionate to the benefits of this type of reporting.
Updating the regime for retail funds
Turning to retail funds, we considered feedback about the way in which some funds are regulated like alternative investment funds, where in principle only retail rules should apply.
This points to a far clearer distinction between the requirements we apply to managers of authorised retail funds and managers of alternative investment funds. The result should simplify the retail rules for non- undertaking for collective investment in transferable securities (UCITS) funds.
There was also feedback on whether non-UCITS funds might be rebranded to help rationalise the regime, and if so, how best to do this. We will continue to explore this option, and welcome further dialogue on branding options.
Supporting technological innovation
Finally, on innovation, the discussion paper touched on how fund managers might adopt distributed ledger technology to offer fully digitised funds to the public. Since then, we’ve been working with the Technology Working Group, which sits under the Treasury’s Asset Management Taskforce, on a blueprint for fund tokenisation. The working group will publish this later in the year.
Many firms see use cases for distributed ledger technology (DLT), even if direct marketing of tokens may be some time off. So, we’ve already held a tech-sprint with the industry to test policy initiatives and the rule changes needed to support work on fund tokenisation.
We’re also building in extra capacity to support innovation as we set out our plans for regulatory reform, well aware of the pace of change. This includes more work on other initiatives, including the Direct2Fund proposal that could make the UK fund dealing model and interactions with investors far more efficient.
We of course want a regime that sets and tests high standards. Because the industry is global, we want our rules to interact effectively with the requirements that firms are subject to in other jurisdictions. As I indicated earlier we do not want to create unnecessary complexity for firms which operate internationally.
And while we can’t influence all the factors that make the UK an attractive place to carry on an asset management business, we can right - size and rationalise unnecessarily complex regulation that can create barriers to entry and impede effective competition.
I think that this approach - with a focus on proportionality - is entirely consistent with our new secondary competitiveness and growth objective. And it’s clear to me that this objective can be delivered whilst continuing to ensure that we resolutely pursue our market integrity, consumer protection and competition objectives.
Productive investment in the UK
Now, I’d like to touch on the wider debate about ways to mobilise domestic savings to fund productive investment in the UK. This is the broader context in which our thinking about asset management sits.
You will be aware that there is a great deal going on in this area, with multiple initiatives and reports making recommendations to reverse what many see as stagnation in the UK’s capital markets. The Chancellor’s Mansion House reforms are a part of this, aiming to funnel more money from UK pension funds into promising UK growth companies.
This includes a value for money framework for DC pension funds which should drive better outcomes for members, enable better investment choices and may incentivise scheme consolidation. The FCA is partnering with the Pensions Regulator and the government on this.
It’s also vital that people get the help they need to make effective investment decisions, understanding the risks they are taking, and the regulatory protections provided.
This is what our joint review with the Treasury of the advice and guidance boundary is all about. The review will look at ways firms can support consumers through different models of help tailored to their needs. And in doing so we would hope to see a greater proportion of domestic retail savings flowing to UK productive assets.
An important question is how product information is presented to consumers, and here we are thinking about how to move from a prescriptive regime to a regime where firms can design good customer journeys.
There’s a lot more going on in this space, from our decision in the summer to enable a degree of retail access to Long Term Asset Funds, to our proposals to amend the listing rules. If pursued these would shift the emphasis from ex-ante shareholder protections to a far greater reliance on continuing disclosure by listed companies quoted on a single market segment.
But I do want to flag that all these initiatives highlight tough issues about societal tolerance of risk. Nikhil has spoken very eloquently about this, which flows into sensitive debates about the scope of redress when things go wrong with riskier investments. And far more fundamentally how to address structural and cultural impediments to providing a secure retirement for millions.
As to next steps, we’ll be consulting on amending the AIFMD regime and re-evaluating the AIFMD rules for non-UCITS retail funds next year. And in 2025 we will review the regulatory reporting regime.
And finally, I would like to emphasise that the FCA fully appreciates the importance of the investment management industry for the UK as an international financial centre and for the UK economy. The Association’s annual survey published yesterday makes this abundantly clear. However, we are also alive to the headwinds which challenge many firms.
Our core objective is to pursue reforms which do their part to strengthen the industry over the years to come, and I hope I’ve given you a sense of what this will look like.