Part 2: The Capital Markets Union: a land of opportunities for Asset Managers

Juncker once famously said “Borders are the worst invention ever made by politicians”.
Since taking up office in 2014, his Commission has been addressing exactly that: Remove obstacles for sustained improvement to the economy which will benefit the European people, regardless of where they are located. This is embodied in Juncker’s ambitious Investment Plan for Europe.

Five years on from the conception of Juncker’s Plan, it has been reported that EU GDP is up by 0. 6%, it is set to create 1.4 million jobs by 2020 and has helped to mobilise billions in private investment for the public good (exceeding original target of €315 billion).
These are not modest statistics – Juncker’s Plan is showing results and have laid down the foundations for further growth in the future. But there is still much to do.

A key ingredient in Juncker’s Plan is the Capital Markets Union (CMU). Since 2014, EU press have been dominated by a blizzard of challenging news; the monumental bailout of the Greek economy, a migration crisis and more recently, the UK’s Brexit referendum result so it is no wonder the CMU has had modest publicity to date. But it is an important Single Market project and one of the key pillars of Juncker’s Plan.

Essentially, the CMU’s key objective is to improve the free flow of investment all across Europe by providing the infrastructure to encourage people and companies to look across their national borders for investment opportunities and capital to benefit its people, businesses and infrastructure.

The CMU & the future of EU Supervision
Refreshingly, the CMU is not another stand-alone piece of regulation or legislation that adds to the mounting compliance burden that most European firms are already grappling with. Instead, the CMU is an umbrella for 23 separate but complementary proposals; a few of which have been adopted into legislation so far.

In its essence, most of the proposals formed under the CMU umbrella is to move the European economy in one direction; To rejuvenate investments and deepen its integration by harmonising national regulation, legislation and supervision, and breaking down obstacles to cross-border investments.

As with any growth programmes, ensuring that proper safeguards are in place is crucial to ensure lasting and sustained results, whilst protecting all parties involved. To be fair, major European regulations introduced in recent years such as MiFID II (and also those about to be enforced e.g. PRIIPS) are playing a part in this vision for Europe by enhancing investor protection, increasing transparency and improving market efficiency to bring the confidence back into the European investments market. Though it may seem that the list of new regulation is ever increasing, we see that the themes and ambition are very much aligned.

With respect to supervision, removing national obstacles to cross-border investment and flow of money has accelerated the call for supervisory and regulatory convergence in the EU. This is particularly important in the area of funds distribution to encourage more cross border investments and support the creation of a Single Capital Market.

Perhaps, another argument for more commonality in supervisory principles, outcomes and culture is that one must also consider that breaking down national barriers may come with risks to the financial stability of the bloc. National crises will no longer be contained in the scenario of a true Single Market; the European Union will truly be operating as one. Enhanced convergence in supervision will help to address this new systemic risk and has been a strategic priority of the CMU proposals.
 
This article originally appeared on the AlgoMe Consulting web site. 

Authored by @Pierre-YvesRahari and @ColinNg

The following is a brief overview of the Treasury Select Committee meeting with the Financial Conduct Authority on 25th June 2019.
 

 
Woodford Investment Management
Unsurprisingly, the highly anticipated subject of Woodford Investment Management’s (WIM) shortcomings was the first topic for discussion at the meeting.
 
The following observations are FSTP’s own view of the possible implications of Woodford Investment Management’s demise (we still don’t know what we don’t know and feel this subject has got some distance to run before all the facts are known).
 
Key points:
This failure of a retail fund will have serious and lasting impact on the operation of Asset Management in the UK.
It throws into sharp relief the requirements falling out of the FCA’s Asset Management Market Study, in particular the need for independent Non-Executive Directors (NED) to challenge at Authorised Fund Manager (AFM) level and the production of qualitative value for money statements for all UK funds.
 
From what we heard, we suspect there will be changes to the rules governing the liquidity of funds which retail investors are able to invest in. Andrew Bailey (FCA’s CEO) highlighted the Regulator’s view that European Union (EU) legislation has failed to manage retail funds. However, FSTP is concerned about an over reliance on principles based regulation (i.e. living within the ‘spirit of the rules’) in this area of Financial Services. Our clients operating in this arena are always looking for clarity and are generally welcoming of prescriptive rules in this area.
 
Despite the introduction of formalised rules on product governance via MiFID II’s implementation in January 2018, distributor/manufacturer relationships and due diligence arrangements appear to be falling well short of regulatory expectations. We surmise that this is likely to result in a greater degree of regulatory intervention.
 
The remuneration of individuals will attract the attention of the wider media and public as this situation develops. In this instance the Senior Managers and major beneficiaries of fees charged are one and the same. On the face of it there appears to be precious little individual accountability and a lack of challenge by others – the prevailing attitude seemingly being, “We pay ourselves what we think we are worth”. However, when that premise is built upon the investments of retail investors (bear in mind how much pension fund money will be tied up here) there has to be a day of reckoning. The message? If you are not providing retail investors with the service they have been led to expect, you cannot continue to reward yourselves so disproportionately. In short, Senior Managers must now be seen to be taking a more overt, moral stand on what is right and fair.
 
Bailey was very strict to follow what he’s already told the media and the Committee’s Chair Nicky Morgan’s question, “Does anyone at the FCA read the papers and listen to what’s going on in the industry?” received a curt reply.
 
The question, “Is it a failure of rules, or a failure of FCA supervision?” received a straight forward response of, “A failure of rules”, with Bailey’s reasoning being that whilst WIM has often had long periods of strong performance and long periods of poor performance, in this instance it is has not been able to save the situation, or the many reputations that have been tarnished as a result.
 
The responsibilities of Link – the AFM for Woodford Funds – was centred on by Bailey who reiterated the regulatory contact that is now well publicised. The Committee observed that Link – previously owned by Capita – did not have a good record of managing Investment Managers on behalf of investors, given they were at the centre of the Arch Cru issues. (N.B. An article in the FT on 25 June alleges that the FCA pressured WIM into using the services of Link – as the largest provider of ACD services – in order for the necessary regulatory permissions to be granted).
 
The relationship between WIM and Hargreaves Lansdown (HL) was raised by the Committee and it became obvious that once the immediate issue of fund liquidity is resolved, a review of the relationship between distributors and manufacturers will be instigated. (N.B at the Investment Association’s annual Policy Conference on Wednesday (26 June) Morgan remarked that the methodology behind Wealth 50’s composition raised questions as to whether customers are being treated fairly, after the TSC received a letter from HL confirming that its influential Wealth 50 list was not solely compiled on performance and that WIM’s inclusion on the list, despite under performance, was impacted by fee discounts offered to the platform).
 
Justice for individuals
A common theme throughout the discussion was ‘justice for individuals’. There is a high degree of dissatisfaction with the complexity of regulation and the consequent lack of clarity for consumers and practitioners alike, with the suggestion being made for the FCA to sort their impenetrable verbiage as most people don’t understand certain aspects such as T&Cs. This concept was understood by attendees from the FCA, who proceeded to mention that they do have enough resources to deal with all issues, and a review of systems and capabilities needs to be looked into.
 
The FCA was forced to comment on its responsibilities under the Equality Act, bearing in mind TSC’s disappointment with the Regulator’s response to the report, ‘Consumers’ Access to Financial Services’, published by the Committee in May 2019. FCA’s Chairman, Charles Randell, stated that this is, “By no means us saying we don’t take our responsibility to consumer vulnerability very seriously”.
 
Culture
Culture was brought into question and Randell mentioned that the FCA’s focus is shifting to outcomes supported by principles. After some bad tempered exchanges Rushanara Ali, MP quipped, “Some would argue that you are not tough enough with bank bosses…are you too nice to bankers. Is it better to be feared, than liked or loved?” Bailey’s quick response of, “I don’t get up in the morning hoping people will love me”, will surely resonate for some time. He also added the FCA has 650 investigations currently underway, compared to the 250 when he took on the role.
 
Brexit
Of course, Brexit did rear its head and Bailey made frequent references throughout the discussion to the fact that regardless of the issues raised and the revisions suggested, Brexit will have a big impact on the FCA’s plans, such as the intended investment in data analytics. However there will be one area that can be assured of relatively no change post-Brexit, the Senior Managers & Certification Regime – it was made clear that the Regime will be implemented in its entirety.
 

 
And finally....
 
Overall, Randell (above left) and Bailey (above right) held their own against some intense questioning, but one wonders how much Bailey’s ambition to be the next Governor of the Bank of England tempered his responses.
 
This was first published on the FTSP LLP blog.