Defined Contribution

Regulators turn their spotlight onto asset managers and their clients

16/11/2015

Many of us may dream of a world when board or trustee meetings are not dominated by regulatory questions, but sadly that remains a long way off. Indeed, the regulatory spotlight is now moving from banks and insurers to asset managers and their clients. Clients are being required to be more than just passive users of services, but to hold managers to account, to scrutinise disclosures and to consider the impact of their actions on, amongst other things, the stability of markets.

In February the Financial Conduct Authority (FCA) published responses to its call for evidence on whether competition is working effectively in wholesale financial services*. One that specifically related to fund management clients suggested that in some cases “those overseeing the selection and oversight of asset managers may lack the necessary resource and/or expertise to do this effectively”. Another was that “only a small proportion of defined contribution schemes had a formal process to assess the quality of the services provided by investment consultants”.

Following on from this, we are expecting the FCA shortly to publish the terms of reference for a market study of competition in the asset management sector. Trustees of pension schemes will have an opportunity to comment on the service and value they receive from asset managers,but are likely also to be asked questions about their own role in holding managers to account.

Meanwhile, two recurring themes that are currently exercising UK and EU regulators are disclosure and transparency. UK trustees are already required to report on transaction costs and administration charges. In the future, the Markets in Financial Instruments Directive II (MiFID II), due to take effect in January 2017, will impose new disclosure requirements on asset managers. They have yet to be finalised, but they may include information on dealing charges and investment research costs. Trustees can expect regulators to ask them what they do with this information when they get it.

More widely, banking and insurance regulators are well on the way to identifying institutions whose failure could have an impact on the overall financial system. The focus is now turning elsewhere and the G20 group of nations has therefore mandated the Financial Stability Board and the International Organisation of Securities Commissions to identify non-banking institutions that are systemically important.

Recognising the difference between banks and asset managers, the two groups have concluded that their priority here is to scrutinise the impact of the activities of asset managers and their clients, rather than the failure of one of their number. Their primary concern is the impact of significant withdrawals on increasingly illiquid markets. Therefore, it is as much about the behaviour of clients as about asset managers themselves. One of the issues they need to understand is the likely behaviour of both retail and institutional investors in circumstances such as a rise in interest rates.

So, far from the regulatory debate receding into the background, it is becoming more important than ever for trustees to engage actively in the discussion. Engagement provides an opportunity for your voice to be heard and to ensure that policy is formed on the basis of a full understanding of how the market works and what you, as a client, want from your fund manager.

This article is taken from the Winter 2015 edition of the Pension Newsletter to view click below.