Revolutionizing UK Asset Management Regime with Technology.
In a recent speech, the chair of the UK Financial Conduct Authority unveiled the priorities for the forthcoming reform of the UK asset management regime. This reform is part of a much broader endeavour of the UK authorities known as the Future Regulatory Framework review.
The position of the UK now consolidated outside of the European Union calls for a review of its entire regulatory framework for financial services. The review aims at creating a UK regulatory framework that can drive respect at international level, ensure competitiveness of the UK as a global market and, most importantly, that retail investors are treated fairly and can access good quality investment products.
Narrowing down the scope of the reform to the asset management industry, based on the feedback received on the first consultation on updating the UK Asset Management Regime, the UK FCA has pinned down the following priorities in the area of asset management:
- Make more proportionate the regime for alternative investment funds;
- Update the regime of retail funds;
- Support the use of technological innovation in asset management.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with the UK Asset Management Regime.
Proportionality in the Alternative Investment Fund Regime
The concept of proportionality plays a very big role across the board in British culture. And the first step in the process to revamp the UK asset management regime is to reconcile the rules applicable today to managers of alternative investment funds to this notion of proportionality.
So far, the UK regime for managers of alternative/professional funds mirrors the European dichotomic size-based approach currently introduced with AIFMD. For managers that meet the AIFMD size thresholds, there is a set of highly prescriptive rules applicable. Whilst there is feedback that these rules might be in certain instances overly protective for professional investors, UK regulators do not plan to significantly alter the structure originally introduced with AIFMD. The issue seems to lie with the exemption regime for small-authorised UK AIFMs. The concern of UK regulators is mostly one of investor protection. Firms operating under the small-authorised UK AIFMs exemption, might market high-risk alternative investments to either retail or elective professional investors in circumvention of the existing rules on promotion of high-risk investments.
One option would be to retain the size-based approach but to align the existing thresholds to the growth experienced by these markets over the past decade. As an alternative, should the size criteria be entirely scrapped, it might be possible to link the use of the UK small-authorised AIFM exemption to other criteria, like the type of strategies and investors. In any event, for there being many small-authorised UK AIFM not being properly managed, the extended scope of this exemption should come in parallel with a heightened standard in the areas of valuation, liquidity and investor disclosure.
Labelling Retail Funds
Considering that one of the main aims underpinning the entire reform of the regulatory framework is to protect retail investors, we can understand how the topic of reforming the current regime for retail funds is delicate. This is where a balancing act is required between not altering structures that are now established in the market, like the UCITS, and allow investors to have exposure to fund products in a market that function well enough for them not to necessarily need the support of an investment advisor when making their investment choices. The UCITS brand was conceived as a brand for mainstream investment by retail investors and evolved to accommodate more complex structures suitable to professional investors. Then there are the Non UCITS retail structures (NURS), by definition more complex in nature.
There are different options on the table when it comes at reforming the retail funds space in the UK. One proposal would be to eliminate the distinction between UCITS and NURS and create one rulebook only for all the various categories of retail funds. This of course would have an impact on the UCITS brand, which is not necessarily what is intended by the UK authorities. Alternative options are all in line with the idea of ensuring an easier labelling for retail funds. On the one hand, NURS could be relabelled as UCITS Plus. This way it would be clear to retail investors that these would be hosting more diverse strategies with a more complex profile risk. Similarly, in addition to UCITS and NURS, a category of very basic funds could be introduced, allowed to invest in the most vanilla and liquid strategies.
Technology, Tokenisation and Disclosures
Whilst regulation is prescriptive on the processes to be adopted in fund operations, it is nowadays still unbiased for what concerns the use of technology. Many options are currently being evaluated as part of the reform of the UK Asset Management Regime to allow for technology to sustain fund managers in their day-to-day operations. This means tokenisation of funds as well as of portfolio assets. The introduction of digital clearing and settlement will not impact the ability of investors to buy funds or of funds themselves to hold assets in their portfolio. Rather, by digitising the entire dynamic, there will be ensuing reduction of timelines and costs with increased certainty of transactions.
But technology should also facilitate the role of fund managers in providing accurate information and disclosures both at the point of initial investment and on an ongoing basis thereafter to their investors. It is interesting – as unexpected – to see that the reform of the UK Asset Management Regime also focuses on fund prospectuses. It is being considered to make the contents of prospectuses modular in nature, so that investors can find in a much easier – and clearly digital – fashion the most relevant information about their investments.
Conclusions
It is early days of this revolution and the consequences of these proposed changes will be seen only in the near future. We can only praise though the pragmatic approach of UK regulators in this process. In more than once instance it has been made crystal clear that reforming its asset management industry does not mean completely disrupt what works of the existing European model. Rather, reinterpret it from a more modern perspective, one which takes into account the evolution that the various markets had over time.
Get in touch here with your contacts at Veneziano & Partners to see how we can help with UK Asset Management Regime.