Asset managers under the microscope

Asset managers have not escaped the post-crisis, post-scandals boom in regulation. Why are regulators so keen to mount the pressure? The key word is ‘accountability’.

Asset managers operating in the EU and UK have been put through a decade of extreme regulatory change, probably as all-encompassing as any period since the early 1980s. New regulations largely stemmed from a reaction to the global financial crisis and subsequent revelations of market distortion in the wider financial system. And while asset managers did not cause the financial crisis, nor have they been found to have played anything other than a slight role in market scandals such as Libor or FX market manipulation, they have nevertheless been caught up in the wider reregulation of the industry as a whole.

New regulations that generally target the buy side and specifically target conduct are now in place. In Europe, the Market Abuse Regulation (MAR) was introduced in mid-2016. At the same time, in the UK the FCA initiated its Senior Managers and Certification Regime (SM&CR). This has been rolled out in stages, initially covering PRA-regulated banks and large asset managers, then insurance companies at the end of 2018. At the end of 2019, it will cover all entities that are regulated by the FCA, including nearly all asset managers operating in the UK market. As a result, nearly 90% of buy side participants in the 2019 1LoD Global Benchmarking Survey & Annual Report highlighted that they are currently in the process of updating their governance, risk and control functions in anticipation of SM&CR.

Other markets have introduced similar rules governing conduct, but these have focused more on the sell side. In the US, theFederal Reserve’s proposed guidance on Effective Risk Management under the Large Financial Institution Rating System, and the US Office of the Comptroller of the Currency Heightened Standards regime target banks more than asset managers. In Hong Kong, the Securities and Futures Commission’s Manager-In-Charge regime focuses on listed company management.

The new regulations covering asset managers, the new guidelines that will need to be followed, and the sanctions for misconduct amount to a wave of regulatory pressure that the buy side has to take seriously. In subsequent articles we will address what firms are doing in reaction to this new regulatory focus on conduct. Here we will look at why the regulators are moving in this direction. 

Who’s responsible?
The overriding theme when looking at the new regulations is accountability. SM&CR demands processes and procedures that will highlight exactly who is responsible for any action, thus making any misconduct easily and directly accountable to individuals. Buy side firms will have to submit organisation charts showing who has responsibility for what. Under MAR, they must report any suspicious trades and will need to show a degree of automation in their monitoring and surveillance activities. 

There will be three different levels of application of the SM&CR – limitedcore and enhanced– depending on the size of firm. Limited will apply to those firms that currently have only small engagement with the Approved Persons regime (which the SM&CR is replacing). But even still, they will have to designate what the FCA terms Senior Management Functions (SMFs), to three different individuals.

Those firms in the core regime will require firms to have six SMFs, each of whom will be required to have a formal Statement of Responsibilities, as well as five further Prescribed Responsibilities (PRs) assigned to individuals. The enhanced regime will require 17 SMFs and 12 PRs.

Buy side in the hot seat
To provide more nuance for asset managers who are caught in the new conduct regime, the FCA has provided further guidance by way of five questions it suggests buy side firms should ask themselves. These were originally laid out in a speech by Megan Butler, Executive Director of Supervision – Investment, Wholesale and Specialists at the FCA in 2017, and then reiterated in subsequent announcements. The questions are:

  • What proactive steps do you take to identify conduct risks in your business?
  • How do you encourage people in front, middle, back office, control and support functions to feel responsible for managing conduct?
  • What support do you put in place to help your people improve the conduct of their business or function?
  • How does your board and executive committee get oversight of conduct in your organisation? And how do you bring it into your discussions?
  • Have you looked at whether there are any business activities you’re engaged in that undermine your work to improve conduct?

Speaking to senior control and compliance officers at large asset managers, they acknowledge that the buy side is firmly in the regulators’ sights. When it comes to market abuse, unlike the sell side where the focus has been on market distortion, for the buy side it is about insider trading and the leakage of inside information. Some asset managers report that the FCA is expecting to see much more evidence of insider trading being reported to them via STORs than has happened previously. One head of compliance said that in his firm, one of the largest asset managers in the UK, they would only report one STOR every one to two years. 

As we will discuss in the next article, the structured nature of investment processes means that if something was remotely suspicious, then the trade would most likely not be made in the first place. 

Is corporate access necessary?
A further area of focus is reported to be corporate access and meetings between investors and corporate management. The FCA is said to be following the lead of the US in questioning the value of corporate access. Under European regulations it is already being counted as an inducement under MiFID II and therefore needs to be paid for. But it is likely to also be examined under market abuse regulations and individuals may be held accountable via their conduct under SM&CR. 

The likelihood is that both asset managers and the regulators are going to take some time to meet each other’s expectations when it comes to 1st line risk and control. In the following article, we will look at what asset managers are already doing in practice to establish control functions and procedures. 

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John Baskott

Welcome to 1LoD's Global Benchmarking Survey and Annual Report 2019, the largest and most comprehensive survey ever conducted on the front office control sector. This year's report was answered by over 30 of the world’s largest financial institutions. We hope you enjoy reading the findings and thank you to everyone who contributed to making it a success. To find out more about upcoming events, our careers hub or other content from 1LoD just visit

John Baskott, Co-Founder, 1LoD

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