FCA at ALFI
At the forefront this week are the key messages from the FCA at the ALFI conference last week. Chris Davis, standing in for Nick Miller – who recently announced his impending move to Moodys (more on that in our ‘On the Move’ section below), brought up three main areas of current focus:
(1) ESG: work linked to the Dear AFM Chair letter (here) on ESG fund authorisations, especially building on the principles of what is expected in terms of design and disclosure of these funds.
(2) Value assessment: building on work in this space and following up on how firms have implemented feedback provided in July 2021.
(3) Liquidity management: continued focus given some funds still having potential stress and fragility – focus will be on liquidity management processes.
Regulatory Wranglings
Growing Pains (post Brexit)
New Treasury proposals have laid out plans for increased parliamentary scrutiny of the City’s regulators – the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) – alongside new details of a post-Brexit regulatory approach that balances the need to support UK economic growth while maintaining regulatory standards. Following on from Rishi Sunak’s Mansion House speech (here), the FT reports on a clear message that the government plans to scrutinise the FCA and PRA more explicitly post Brexit and that the objective for FCA and Bank of England to “consider both the implications for growth and international competitiveness of their regulations could give the UK an edge over the EU because regulators in Brussels do not have a mandate to consider growth.” Read the article here.
The proposals, which form part of the consultation open to feedback until 09 February 2022, are here.
Real Economy issues
Liquidity issues potentially raise their head again with global policymakers considering whether more macroprudential regulation is needed in the fund industry to protect the real economy.
Referring to the funds industry’s struggles to maintain liquidity when investors wanted to redeem in March and April 2020, Ignites Europe quotes Lee Foulger, director of financial stability strategy and risk at the BoE that it exposed “some existing structural vulnerabilities in market-based finance that we need to take seriously”. While asset managers have argued that “any policy action as a result of last year should be limited in scope as the majority of the industry came through the issue well”, boards overseeing funds with less liquid assets should expect this topic to remain high on the regulatory agenda in 2022. Read the full article here.
The Independence of Boards
Could all ‘fund boards’ be wholly independent?
The Institute of Directors (IoD) brings to the fore the call for ‘truly independent natural persons in the oversight of funds’ to champion investors. Ignites Europe, here, quotes Roger Barker, author of recent IOD blog, here, as saying that board functions being fulfilled by a corporate entity rather than real people is “increasingly frowned upon” and that having “truly independent natural persons included in the oversight of funds is necessary “to improve investor protection and rebuild trust in the industry”. The paper looks to examples such as governance models in the US to provide potential solutions but acknowledges that these would require “significant change” and probably an increase in costs.
The US model is not without its own challenges – a fact it seems which was not lost on the FCA when designing their approach to fund governance in the UK, yet it’s clear that the scrutiny applied to the evolving role of independent directors on fund boards in the UK is unlikely to abate any time soon. If you are interested in the state of US independent directors on fund boards, see here for a recent report published on US fund governance practices (released by the Investment Company Institute & Independent Director Council).
Equal Payday
Thursday 18th November was ‘Equal Pay Day’, marking the point in the year when women in the UK effectively stop being paid relative to men.The FN London view from Maike Currie, head of personal finance and markets content at Fidelity International, points out some of the issues including the cost/challengers of childcare and ‘good daughter’ penalty. Read the view here.
Investing for Good?
First up in this section has to be the recent Ignites Europe article highlighting ESG-related governance – and the lack of it. Responsible investing charity, ShareAction, has condemned this as “10 years behind”. As a key topic at the front of mind for fund boards, FBC’s very own CEO Shiv Taneja also provides his thoughts. Read the full article here.
Want to cut through the noise and get to the heart of what fund board directors really need to know and be thinking about regarding Responsible Investment (RI)? FBC kicked off the first in a series of sessions doing just that last week. FBC corporate members can catch the introductory speaker comments from the session held by FBC senior adviser Brandon Horwitz and his panel of experts from St James’s Place, HSBC and Liontrust, here. The next in the series will take place in March and FBC members can register their interest in the event here.
Guidance Against Greenwashing
More guidance is on the horizon for the Sustainable Finance Disclosure Regulation (SFDR) amid concerns that flaws in the regulation could enable greenwashing by asset managers, as reported in Ignites Europe here. But, on the flipside, it looks like the complexity of the technical standards could result in delays, BNN Bloomberg reports here.
And taking a close look at the SFDR fund coverage, the European Fund and Asset Management Association (EFAMA) has published a report revealing the size of the European environmental, social and governance fund industry and, importantly, it’s unevenness. In the Ignites Europe article, here, Thomas Tilley, senior economist at the European fund body, “attributes this to a variety of factors, including national regulators’ different interpretations of the main SFDR text and the delayed implementation of supporting measures” and “varying maturity levels of ESG fund markets between member states”.
Green funds in the red
Despite investor desire to invest in ‘green funds’, their impact is still in question. Ignites Europe reports, here, on a new analysis concluding that “green finance does not necessarily have the positive characteristics that investors hope for”. The full study was carried out by the Leibniz Institute for Financial Research SAFE, the ESMT Berlin University and the Leibniz Institute for Economic Research.
Auditing the Auditors
Auditing good practice is in the spotlight with coverage on the Financial Reporting Council’s (FRC) intention to publish a new guide. This follows the focus from the previous week on dilution of internal controls effectiveness auditing vs. the FRC Consultation. Read the articles here and here. The FRC Consultation is here.
Also worth a read is the letter to the FT from Will Goodhart and others from the CFA Institute with the challenge: “…why water down measures that would reduce the risk of fraud and misstatements? As usual, however, the UK seems likely to fall back on the corporate governance code, which the good follow and the bad neglect.” Well said. The letter is here.
On the Move
We’re sure that you won’t have missed the imminent departure of Nick Miller from the FCA. The watchdog’s head of asset management will be leaving to join ratings agency Moody’s after almost eight years at the FCA. Get the lowdown in Financial News here.
Longer Reads
Value for Money
The Pension Policy Institute’s analysis of Value-for-Money initiatives across various international pension systems, with lessons for the UK, throws up some fascinating data. Some findings mirror UK initiatives, including the FCA’s AoV approach and findings in the Asset Management Market Study, but take a look for some particularly surprising observations on Economies of Scale.
Read the full report here.
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