The UKs Financial Conduct Authority (FCA), formerly the Financial Services Authority, has marked its entry into existence with the publication of its first business plan.
The business plan is published against the back drop of what the new regulator, which will be responsible for regulation of conduct in retail, as well as wholesale, financial markets and the infrastructure that supports those markets, calls a critical time in financial services. It promises a wide-ranging review and greater scrutiny of areas in financial services including custody, securities lending, foreign exchange, collateral management, derivatives clearing, data analytics and transition management. The FCA is confirming the dates related to these reviews but the work will fall within the year 2013/14.
In the publication, the FCA sets out its priorities for the year ahead. At the same time it has published an FCA Risk Outlook, which sets out the challenging economic backdrop, plus the framework against which it will assess the condition of the markets and will seek to identify future risks to its objectives.
Underpinning the FCAs work is a strategic objective of making markets work well and its three operational objectives, which are: delivering consumer protection securing an appropriate degree of protection for consumers; enhancing market integrity protecting and enhancing the integrity of the UK financial system; and building competitive markets promoting effective competition in the interests of consumers.
In the business plan, the FCA notes custody banks are facing considerable pressure on their business models are evolving and the basic premise of providing safekeeping and custody of client assets which is high volume and low margin is facing strain in the ongoing low interest-rate environment and because of changing regulatory requirements.
Consequently, custody banks have become increasingly reliant on revenues from secondary services such as securities lending; foreign exchange; collateral and cash management; derivatives clearing; and data analytics, research services and transition management, said the FCAs business plan.
There is a risk that the pressure on firms to improve profitability could lead to harm to consumers, it said. We want to investigate the transparency of secondary services to establish whether investors are being disadvantaged or charged excessively.
In 2013/14 the FSA will assess the secondary services of custody banks to measure the impact of current practices on their business models, on direct clients and, where possible, on the indirect end-consumer. The FCA intends to identify the scale of any issues and develop a strategy for reducing risk where it finds issues.
It also addresses transition management, where it says the use of affiliates by transition managers, unclear fee structures and complex legal and pre/post-transition documentation can result in poor customer outcomes. This may have an immediate impact on pension fund holders and cause a deterioration in market confidence, with clients choosing not to use TM to manage portfolio allocation risk, it says. There is evidence that the level of transparency and market conduct among TM participants is not to the standard we require.
In 2013/14 we will undertake a project to review practices across the main TM industry participants to assess whether customers are being treated fairly.
Additionally, the FCA says its supervisory work shows that a number of firms have inadequate records and ineffective segregation of client assets, heightening the risk that any departures from the market could prove disorderly, causing harm to clients, creditors and counterparties and the market as a whole. Increasing firms compliance and awareness of Managing Client Assets (CASS) rules is a key aim for us in 2013/14, it said. As such, it will increase the supervision of firms holding client money and safe custody of assets through more intrusive visits to firms, thematic projects and desk-based reviews, actions initiated through Client Asset and Money Return (CMAR) /audit information and taking regulatory action where firm failings are identified.
Among the key forward looking risk the FCA notes distribution channels do to not promote transparency for consumers on financial products and services it lists custody banks and transition management in this respect.
(JDC)