FCA update on reforms to the asset management regime

In October 2023, FCA Chair Ashley Adler delivered a speech on the FCA’s priorities for updating and improving the UK regime for asset management. The speech comes following the FCA having now considered the responses to the Discussion Paper (DP23/2), which ended in May 2023.  

As a reminder, DP23/2 sought views on how FCA should look to improve asset management regulation with a more modern and tailored regime for UK consumers and markets. The areas for discussion were naturally wide-ranging, however some of the possible areas for change included:

·        Creating a common framework of rules for asset managers regardless of type of firm (e.g. AFM, AIFM, MiFID portfolio manager etc.)

·        Changes to the rules applicable to managers of non-authorised funds e.g. changes the threshold at which AIFMs must apply the full-scope rules

·        Changes to the rules applicable to managers of authorised funds e.g. enhancing liquidity management arrangements and clarifying expectations around investment due diligence; and

·        Changes to the rules to respond to technological advances e.g. fund unit tokenisation and the ability of funds to invest in tokenised assets

So, what does the recent speech tell us about the direction of travel for the UK asset management regime?

FCA identified 3 main three main priorities for reform:

1.     Making the regime for alternative fund managers more proportionate.

Currently, alternative fund managers are either in or out the detailed rules contained in AIFMD based on the value of the assets under management (100m/500m depending on the types or strategies of the funds managed). So there are two different categories of manager (small versus full-scope) and different rules apply to each. Instead, FCA will ensure the regime operates proportionately depending on the nature and scale of a firm’s business.

In practice, this could mean requirements that apply to full scope managers by law (e.g. risk management, valuation, conflicts of interest) could be applied to smaller managers. FCA are considering easing some of the requirements for full scope managers around FCA reporting (e.g. 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).

2.     Updating the regime for retail funds

In the DP, FCA note that the authorised retail funds regime currently consists of UCITS funds and non-UCITS retail funds (NURS) but that the market for authorised funds can be hard to navigate for consumers, and it can be difficult to distinguish between different types of funds. FCA contemplated the benefits of having a regime, or sub-category of the retail funds regime, to improve this.

In the most recent speech, Ashley Adler confirmed the intended result was a simplification of the retail rules for non-UCITS funds. And, to assist rationalise the regime, FCA will continue to explore the option of rebranding non-UCITS funds.

3.     Supporting technological innovation.

The DP touched on how fund managers might adopt distributed ledger technology to offer fully digitised funds to the public. FCA have been working with the Technology Working Group, which sits under the Treasury’s Asset Management Taskforce, on a blueprint for fund tokenisation. A Report was published on 24 November 2023.

What do we think?

A firm’s response to the possibility of being subject to more FCA rules is, understandably, not always positive. However, for small fund managers unsure on which requirements apply and whether these are rules or applied as best practice or regulatory expectation, clarity should be welcome and would provide a framework which smaller firms could lean on when developing internal structures and controls.

That being said, we would be concerned with an overzealous application of additional requirements to these smaller firms. The DP and most recent speech make several references to size and proportionality. However, the issue with proportionality is that it is highly subjective. In practice, where the FCA Handbook is ambiguous, the regulator leans towards the highest standards, not necessarily the most 'proportionate'.

If you have any questions on this article and how the development might impact you, please get in touch.