Joining the dots in asset management: SMR and the market study

10 August 2017

Recently, I’ve talked to many clients about both the Financial Conduct Authority’s (FCA) Asset Management Market Study and the extension of the Senior Managers Regime (SMR) to all FCA regulated firms. While both topics are separately initiated, increasingly the interlinkages make considering either in isolation challenging for firms.

In the market study, the FCA’s focus on value resulted in a new Senior Manager prescribed responsibility to 'act in the best interests of investors'. This prescribed responsibility must be allocated to the Chair of the Authorised Fund Manager (AFM). As part of their responsibilities the Chair would also be responsible for annually documenting the ongoing assessment of value. This feels like a tough challenge particularly given the current governance model of many AFM boards, but it ought not to be an insurmountable one. 

In contrast, when you delve into the detail of the SMR consultation, it becomes clear that the prescribed responsibility actually has three elements: to act in the best interests of investors, to annually document the value assessment and to take regulatory responsibility for sufficient independence on boards.

While this isn’t a significant additional burden, it does show the importance of viewing regulatory changes in the round. My concern is that while it’s only ‘a little bit more’ there comes a tipping point: placing more and more responsibility onto one person risks making a role unappealing, particularly to top talent. One of the key concerns among banks when implementing the SMR was that top talent might be discouraged by the risk profile of a role, particularly independent directors with vital skill sets who might not have a background in financial services. It’s important we achieve the right balance between risk and responsibility.

A second example of interlinkage relates to the way duties are discharged. Under the market study, the firm must take 'sufficient steps' to address any poor value for money outcomes identified. Under the SMR, a senior manager must take 'reasonable steps' to discharge their duty of responsibility.

Again, taking these two requirements together results in a senior manager having to take ‘reasonable steps’ to ensure the firm has taken ‘sufficient steps’ to achieve a particular outcome. This feels disjointed, and somewhat difficult to regulate. Could there be a situation where an individual has taken reasonable steps, but the firm has not taken sufficient steps, or vice-versa? Is this double-jeopardy, or using multiple rules to achieve the same outcome?

The FCA is very active in the asset and wealth management sector this year. What I’m keen to highlight is that to achieve clarity and efficiency firms need to consider the range of regulatory initiatives as a whole, and the FCA needs to understand and be clear on what it is fundamentally trying to achieve. Only then can the industry work together effectively to produce the right outcomes for customers.

Amanda Rowland | Partner
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