There has never been so much regulation in the industry as there is today.  It’s incredibly hard to keep track of all the consultations, timetables and whatnot.  To give you a fighting chance, what follows is the lowdown on the key regulations that are currently underway which will have an impact on the UK asset management industry.  As the diagram below suggests, it’s a pretty intimidating outlook. 

(As an aside, given the plethora of regulation, we think it needs a collective noun.  The IMA have captured it beautifully in their diagram title here – a ‘storm’ of regulation.)


Source: IMA

In the UK

Close to home, there’s not too many regulations but they are far-reaching.  With new regulators and new regulations, 2013 will be an interesting year.

Financial Services Bill

The Bill provides a new framework for financial regulation in the UK – it makes the Bank of England responsible for ensuring and protecting the stability and resilience of our financial systems.  There are four key elements:

  • Establishing the Financial Policy Committee (FPC) – the FPC will ensure the resilience and stability of the financial system as a whole
  • Clarifying responsibilities between the Treasury and the Bank of England in the event of a financial crisis by giving the Chancellor of the Exchequer powers to direct the Bank of England where public funds are at risk and there is a serious threat to financial stability
  • Introducing the Prudential Regulation Authority (PRA) – the PRA will regulate institutions that manage significant risks on their balance sheets
  • Introducing the Financial Conduct Authority (FCA) – the FCA will have responsibility for ensuring the relevant markets function well, that consumers are protected and competition is effective.

The Government’s aim is for the new system to be operational in early 2013.

Find out more here.

Retail Distribution Review (RDR)

The RDR, subject to much discussion here on the Kurtosys blog, will come into effect at the end of 2012.  It will apply to all advisers in the retail investment market, regardless of the type of firm they work for.  The changes are far-reaching and challenging; they will affect banks, product providers, IFAs and wealth managers.  An important element of the new RDR framework is changes to the professional standards for advisers.  Firms will have to ensure their advisers meet the continuing professional development requirements (CPD), as well as holding the requisite professional examinations.  RDR also aims to improve the clarity with which firms describe their services to customers and to address the potential for adviser remuneration to distort customer outcomes.

Find out more here.

FSCS Funding Model Review

The Financial Services Compensation Scheme is currently under consultation.  It recommends two different approaches for funding FSCS costs depending on whether an organisation is subject to either the Prudential Regulation Authority’s (PRA) funding rules, such as deposit takers and insurance providers, or, as will be the case for Asset Managers, the Financial Conduct Authority’s (FCA) funding rules.   The paper also recommends changes to the proposed annual thresholds that each class may be required to pay and the way in which classes cross-subsidise each other (or not) if thresholds are breached.

Find out more here.

Client Asset Sourcebook (CASS)

CASS sets out the requirements relating to holding client assets and money. The FSA’s consultative paper (CP12/15) recommends extending the current limited arrangements to allow firms, where necessary, to opt-in and to re-categorise to a higher CASS firm type throughout the year.  The paper also confirms small CASS firms are not required to submit the Client Money & Asset Return (CMAR).  CMAR guidance notes and CASS rules will also be updated to improve clarity.  The final rules are planned to come into force on 1 January 2013.

Find out more here.

In the EU

Looking through the proposed European changes, you can clearly see the impact the financial crises have had, and continue to have, on developing regulation.  ‘Closing loopholes’ was the most commonly cited reason for instigating changes to existing directives.

Credit rating agencies (CRA) regulation

The CRA regulation sets out to ensure that financial institutions do not blindly rely on credit ratings for their investments.  Regulated financial institutions – including banks, insurance companies and investment fund managers – would be required to develop their own rating standards, to enable them to prepare their own risk assessments and therefore not rely entirely on external ones.  It also proposes more frequent and more transparent sovereign debt ratings.

Find out more here.

Investor Compensation Scheme Directive (ICSD)

The aims of this directive are to introduce swifter payouts to financial consumers and to harmonise the level of compensation (under the new proposals, the first €50,000 of investors’ money would be compensated).  To provide investors with clear information about the extent to which their assets are protected and it seeks to address the quality, consistency and funding of schemes across Member States.   Changes to the ICSD will impact on the UK’s FSCS.

Find out more here.

Alternative Investment Fund Managers Directive

(AIFMD) – The AIFMD is a proposed European Union law which will put hedge funds and private equity funds under the supervision of an EU regulatory body.  The Directive will increase the amount of disclosure made by funds, both to investors and supervisors.  The Directive also imposes requirements on managers in terms of organisation, capital, depositaries and marketing of funds.  Implementation is expected in 2013.

Exchange Traded Funds (ETF) Guidance

The guidelines call for ETFs that enter into so-called “efficient portfolio management” (such as securities lending) to ensure that investors are clearly informed of these activities and the related risks.  Also ETFs must be properly labelled and securities lending revenue must be returned to the fund in full.

Find out more here.

Short selling regulation

The EU Short Selling Regulation introduces a pan European disclosure regime for net short positions in EEA listed shares and sovereign debt, as well as a ban on naked physical short sales of EEA listed shares and sovereign debt.  The Regulation came into force on 25 March 2012, and its provisions will apply from 01 November 2012.

Find out more here.

European Social Entrepreneurship Funds Regulation

The proposal sets out a new ”European Social Entrepreneurship Fund“ label, so investors can easily identify such funds.  Every fund using the label will have to prove that a high percentage of investments (70% of the capital received from investors) are spent in supporting social businesses. Uniform rules on disclosure will ensure that investors get clear and effective information on these investments.

Find out more here.

European Venture Capital Funds Regulation (EVCFR)

The European Commission’s EVCFR proposal is part of the Commission’s action plan to improve access to finance for SMEs. It introduces uniform requirements for venture capital fund managers that want to operate under an EU-wide passport

Find out more here.

Insurance Mediation Directive

The proposals aim to make it compulsory for all intermediaries to disclose what remuneration they are receiving.  This is likely to have a significant effect on most insurer/intermediary relationships in the UK general insurance market.  The changes also target insurance companies selling insurance direct to customers as well as firms acting as intermediaries.  And it intends to impose new information requirements in relation to bundled products.  The proposals should come into force in 2015 at the earliest.

Find out more here.

Phew.  There’s so much more to come.  Let’s pause for breath here, to give you time to digest and consider what these changes mean for you and your business.  Look out for part II next week.

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Hazel McHugh

Before becoming a freelance writer and digital marketer, Hazel was Group Marketing Manager at Santander.
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