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Asset Management Market Study

This was a thematic review by the FCA, starting in November 2015 and with a final in June 2017, with subsequent up dates in 2018 and 2019.  The FCA wanted to understand how asset managers compete to deliver value to both retail and institutional investors. Following our terms of reference, we conducted analysis of over 20,000 share classes and 30,000 investment strategies.  In November 2016 the FCA published its interim report. This set the FCA’s provisional view on the way competition works for asset management services, the resulting outcomes for investors and our proposed remedies to address concerns identified.


The FCA found that price competition is weak in a number of areas of the industry. Despite a large number of firms operating in the market, based in its sample, the FCA found evidence of sustained, high profits over a number of years. It found that investors are not always clear on what the objectives of funds are and fund performance is not always reported against an appropriate benchmark. Finally, the FCA had concerns about the way the investment consultant market operates.


For a comprehensive understanding of the AMMS and solutions to the issues it highlighted, please click on the link to the members area ASSET MANAGEMENT MARKET STUDY.

Authorisation by the FCA

Firms are required to be authorised by the FCA if they undertake any of the regulated activities listed in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the Order). Authorised firms are subject to a set of overarching principles and rules issued by the FCA. These principles and rules have to be followed when an authorised firm is carrying on regulated activities in the UK. The Order excludes certain activities from its scope.



Conduct Of Business Rules

The Conduct of Business Sourcebook (COBS) and Insurance Conduct of Business Sourcebook (ICOBS), such as for advised products (Business Standards).  COBS and ICOBS came about from the regulator moving away from tick-box regulation to principle-based regulation.  That basically means a shift of emphasis from detailed rules to principles and high-level rules and guidance. 


Activities subject to COBS

  • designated investment business

  • long-term insurance business in relation to life policies

  • activities relating to the above


Client Categorisation (COBS 3)

  • Retail

  • Professional

  • Eligible counterparties


Client Protection

A retail client – highest level of protection.  A client may opt down to a lower level and become an elective professional client.  However, hard for retail clients to opt down to professional clients, although can be reclassified on a transaction by transaction basis.


Elective professional client – meet 2 out of the below criteria:

i.average trade frequency of greater than 10 trades per quarter over the previous 4 quarters

ii.portfolio worth £500k

iii.worked or involved in the financial sector for more than 1 year in a professional capacity


Furthermore, a firm must apply a qualitative test to assess the expertise, experience and knowledge of the client.


Communicating with clients (COBS 4) – fair, clear and not misleading

Core of the financial promotion rules and the information that should be given to clients:


  • FCA as the regulator

  • Financial promotions where the client’s capital is at risk – must say so

  • Information on yields – ST and LT prospects

  • If complex – clearly explained

  • Packaged product – accurate, fair and clear

  • Past performance - show effects of charges and commission 

  • Approval needed for all promotions


Advising and Selling (COBS 9)

Rules on suitability apply when firms make a personal recommendation relating to designated investments and when they manage investments.  All decisions need to be suitable - Principles of Business 9.


Suitability – 3 elements:


i.Not execution only and

ii.the client is not a professional client (necessary knowledge)

iii.Once suitability is established, reports must explain why the recommendation is suitable, with the advantages.  Must be sent prior to the conclusion of the transaction.


Under Dealing and Managing (COBS 2, 9, 11 ,12) - Conflicts of Interest (SYSC 10)

Firms must take reasonable steps to identify conflicts of interest between the firm and the client (principle 8 of the principles of business).  Firms are obligated to:


  • maintain effective organisational and administrative arrangements to prevent conflicts

  • barriers around external research sent to clients, to other departments (Chinese walls)

  • any conflicts that cannot be managed away are disclosed

  • conflicts policy and provide clients with the policy

  • keep records where conflicts have arisen


Reporting to clients (COBS 16) occasional reporting

Occasional reporting for those firms, other than for firms managing investments, to give adequate disclosure to clients regarding any orders carried out on their behalf:


  • provide the client, in a durable medium, with the essential information concerning the execution of the order

  • for a retail client, send the client a notice in durable medium, confirming the execution of the order and trade confirmation information

  • as soon as possible and no later than the first business day following that transaction

  • on request, information about the status of their order



Conduct Risks

The risks arising to consumers (whether retail or otherwise) or to markets arising from the behaviour of the firm’s employees or of the firm as a person in its own right.


In the UK, the FCA took over supervision of consumer protection from the FSA and published its Risk Outlook 2013, which outlined the new conduct risk regime.  When the FCA and other regulators talk about “conduct risk”, they tend to mean the risk to customers of banks’ controls and operations failing. It blurs with the more general concept of financial consumer protection.  Conduct Risk evolved from Treating Customers Fairly (TCF) which is based on Principle 6: “A firm must pay due regard to the interests of its customers and treat them fairly”.


What exactly is conduct risk? A typical response might be that conduct risk arises as a result of how firms and employees conduct themselves, particularly in relation to clients and competitors. In this case, poor management of conduct risk might result in problems such as mis-selling, market abuse and fraud, along with lawsuits and fines.


Conduct risk is any action or inaction by the firm that could lead to financial detriment or non-financial disadvantage to customers, clients and counterparties or undermine market integrity. 


Conduct risk is an integral part of the firm’s overall risk management structure.  The firm’s governing body must own conduct risk, including conduct risk within integrated risk management structure.


Issues to be addressed would include:


  • Identification of the relevant risks

  • Actions to remove or mitigate risks

  • An assessment of the risk based on probability and impact

  • Appetite for risk – in terms of the consumer and amount of errors that could give rise to consumer detriment

Appendix: Text

For further information on conduct risks ( or to arrange a call to discuss how Governance Connect can help you within this area please email

Due Diligence (DD) Review

A Due Diligence (DD) review and the subsequent Report cover:


  • Systems and Controls – operations working as they should and monitored for any conduct risks

  • Governance (committees, Terms of Reference, Action Logs etc)

  • Oversight – senior management have the appropriate management information on the business

  • Risk identification – based on appropriate and accurate MI to avoid risks becoming issues

  • Risk and Action logs  - are acted upon and monitored (to identify and control risks)

  • Processes are reviewed

  • Procedures are followed

  • Compliance with rules, regulations and principles

  • Fund compliance – to deliver compliant financial products

  • Treating Customers Fairly – customers are at the heart of the firm

  • Investment process – followed and controlled


Carried out by

        1. Pre-Audit Questionnaire (PAQ) sent to the asset manager

        2. Request for Policies and Procedures for reviewing

        3. On site visit to meet various departments to understand how the theory is translated into the

            actual management and delivery of a compliant financial product or service

        4. Report written with summary of key points


(Post the DD Review) Governance Oversight framework

After an initial due diligence is undertaken and the financial product is signed off, it will be important that an ongoing oversight framework is put in place, separate from BAU daily monitoring:


1.Desk based reviews (bi-annual) – helps to determine the riskiness of the fund and asset manager

2.Product Governance reviews (annual or bi-annual) – to identify any emerging conduct risks and make sure the product is fit for purpose and can be sold

3.Investment management review (monthly and quarterly) – to monitor and “challenge” on investment performance and investment risk


For further information please contact



Financial Conduct Authority (FCA)

The Financial Conduct Authority (FCA) is an independent non-governmental body, which replaced the FSA in April 2013. It has statutory powers provided by the Financial Services and Markets Act 2000. The FCA regulates the financial services industry in the UK. It has regulation-making, investigatory and enforcement powers. The FCA is obliged to have regard to the Principles of Good Regulation.


The Financial Conduct Authority (FCA) is the conduct regulator for financial firms and financial markets in the UK, and the micro-prudential regulator for those firms not supervised by the PRA. It is a company limited by guarantee and funded by the industry it regulates through statutory fee-raising powers. It is an agency that was formed to take over those parts of the Financial Services Authority not covered by the PRA. The FCA is responsible for maintaining the integrity of the UK’s financial markets. It is also expected to be a consumer champion with focus on ensuring competition and promoting better choice.


The UK Parliament created the FCA and gave it an additional objective and duty to promote effective competition. To do this, the FCA undertakes analysis of markets and tries to understand how information and consumer bias create poor customer outcomes and distort the market. As a result, there are important implications of behavioural economics for the conduct of regulation in retail financial markets. The FCA uses behavioural economics to detect and correct problems in markets for retail financial services.


‘Behavioural economics helps to formulate what the FCA means by an appropriate degree of consumer protection.’ FCA Occasional paper: No 1. April 2013


FSA disbanded in 2012.


1.FPC – Financial stability of the system – run by the BOE.  This organisation then delegates to

2.PRA – Prudential Regulatory Authority – looks at banks and the amount of risk they are taking

3.FCA – Financial Conduct Authority


The FCA is governed by a board with members comprising:


  • a Chair and a Chief Executive appointed by HM Treasury (Treasury)

  • the Bank of England Deputy Governor for prudential regulation

  • two non-executive members who are appointed jointly by the Secretary of State for Business, Innovation and Skills and the Treasury, and

  • at least one other member appointed by the Treasury.


The majority of the Board members are Non-Executive Directors (NEDs).


The board sets the FCA’s strategic aims and ensures that the necessary financial and human resources are in place for the FCA to meet its statutory objectives. It provides leadership of the organisation within a framework of prudent and effective controls which enables risk to be assessed and managed. It also reviews management performance. The board sets the FCA’s own behavioural standards, for example through the Code of Conduct and the Corporate Responsibility Policy.


It has several committees to which it delegates certain function/powers; amongst these, this includes:


  • the Executive Committee (ExCo), which is the highest ranking executive decision-making body of the FCA, and discusses issues across all areas of the organisation

  • the Regulatory Decisions Committee (RDC), which exercises certain regulatory powers in relation to the giving of supervisory notices, warning notices and decision notices on behalf of the FCA as described in the FCA Handbook.


The FCA has a proportionate approach to regulation, prioritising its work on the areas and firms that pose a higher risk to its objectives. It aims to use forward-looking and judgement-based regulation, with a view to understanding firms’ business models and future strategies. The FCA intervenes if it sees unacceptable risks to the fair treatment of customers or the integrity of the market.


The FCA assesses single-regulated firms for conduct and prudential issues; it assesses dual-regulated firms for conduct only. The PRA assesses prudential issues for dual-regulated firms.

The FCA applies the following principles:


  • Aligning the assessments of new applications to the risk they pose to the FCA’s statutory objectives; firms with products and services that pose a risk to customers are not authorised.

  • Being open with all potential applicants as they go through the authorisations process, making sure that communications occur early on so that the firm understands what is required of it. The FCA looks closely at the proposed business model and the viability of the firm over a medium-term horizon.

  • Processes are structured to support the operational objectives.

  • Refusing applications at an early stage if the FCA does not think the proposed offering of products or services is in the interests of consumers or, more broadly, if it poses a significant risk to the FCA’s objectives.

  • Sharing any risks and underlying themes that are identified with supervision colleagues so they can monitor and assess them on an ongoing basis once a firm or individual is authorised.




The FCA took over enforcement from the FSA. The FCA is intentionally transparent in its work and publicises, as much as possible, cases where it has intervened but formal action is not being taken and also final notices providing details of the enforcement action and fines for firms and individuals. Examples of its powers include being able to:


  • withdrawing a firm's authorisation

  • prohibiting individuals from carrying on regulated activities

  • suspending firms and individuals from undertaking regulated activities

  • issuing fines against firms and individuals who breach our rules or commit market abuse

  • issuing fines against firms breaching competition laws

  • making a public announcement when we begin disciplinary action and publishing details of warning, decision and final notices

  • applying to the courts for injunctions, restitution orders, winding-up and other insolvency orders

  • bringing criminal prosecutions to tackle financial crime, such as insider dealing, unauthorised business and false claims to be FCA-authorised

  • issuing warnings and alerts about unauthorised firms and individuals and requesting that web hosts deactivate associated websites.


Statutory Objectives of the FCA

The FCA regulates all products issued by financial firms, either sold direct to customers, or as wholesale services to other firms. It is able to censor the marketing used and issue 12-month or permanent bans to individual products. The FCA sees the job of enforcement as helping to change behaviour by making it clear that there are real, meaningful consequences for those firms or individuals that do not play by the rules. The FCA states that credible deterrence is central to the FCA’s approach: pressing for tough penalties, pursuing individuals and senior management, criminal convictions, tackling unauthorised business and prioritising compensation for consumers.


The BoE describes the FCA’s role as being ‘responsible for ensuring that relevant markets function well. In doing so it will aim to advance the protection of consumers, the integrity of the UK financial system and promote effective competition. It will be responsible for the conduct regulation of all financial services firms. This includes acting to prevent market abuse and ensuring that financial firms treat customers fairly. The FCA will also be responsible for the micro prudential regulation of those financial services firms not supervised by the PRA, for example, asset managers, hedge funds, many broker-dealers and independent financial advisers.’ Source: Bank of England Quarterly Bulletin 2013


FCA Operational Objectives


  • Secure an appropriate degree of protection for consumers.

  • Protect and enhance the integrity of the UK financial system.

  • Promote effective competition in the interests of consumers.

This is upheld by the FCA taking a judgement-based, forward-looking, and pre-emptive approach in assessing potential and emerging risks. This approach helps the FCA to respond promptly and effectively to wrongdoing that threatens their objectives.

The FCA Risk Outlook and Business Plan in 2013 set out to consumers and firms how the FCA planned to use its resources and the activities the FCA intended to undertake in 2013–14 to address crystallised risks, such as PPI mis-selling (and actually placing advertisements in national papers to get customers to complain) and LIBOR fixing and to meet its strategic priorities. The latest Business Plan for 2016/17 incorporates the Risk Outlook and Business Plan together in one document and builds on earlier activities, as summarised below.


Within the Business Plan, the Risk Outlook helps to define the FCA’s conduct risk remit and sets out the key drivers of conduct risk and key risks for the coming year. The FCA begins by setting the scene as to the key themes for consumers changing population, work and UK financial services. The FCA groups key drivers into inherent factors, structure and behaviours and, lastly, environmental conditions. A key tenant on how the FCA carries out its work is through the use of behavioural economics. For 2016/17, the FCA has set out the following priorities for their activities:


  • pensions

  • financial crime and anti-money laundering

  • wholesale financial markets

  • advice

  • innovation and technology

  • firms’ culture and governance

  • treatment of existing customers.


FCA Supervision

The FCA’s new approach to supervision is built on ten principles which form the basis of their interaction with firms of all categories:


  1. Ensuring fair outcomes for consumers and markets – this is the dual consideration that runs through all their work; how they will assess issues according to their impact on both consumers and market integrity.

  2. Being forward looking and pre-emptive – identifying potential risks and taking action before they have a serious impact.

  3. Being focused on the big issues and causes of problems where they will concentrate their resources on issues that have a significant impact on their objectives.

  4. Taking a judgement-based approach with the emphasis on achieving the right outcomes.

  5. Ensuring firms act in the right spirit which means the FCA will consider the impact of their actions on consumers and markets rather than just complying with the letter of the law.

  6. Examining business models and culture and the impact they have on consumers and market outcomes. The FCA is interested in how a firm makes its money as this can drive many potential risks.

  7. An emphasis on individual accountability – ensuring senior management understands that they are personally responsible for their actions and that the FCA will hold them to account when things go wrong.

  8. Being robust when things go wrong – making sure that problems are fixed, consumers are protected and compensated and poor behaviour is rectified along with its root causes.

  9. Communicating openly with industry, firms and consumers to gain a deeper understanding of the issues they face.

  10. Having a joined-up approach – making sure firms receive consistent messages from the FCA. The FCA will engage with the PRA to ensure effective independent supervision of dual-regulated firms and work with other regulatory and advisory bodies, including the Financial Ombudsman Service, Financial Services Compensation Scheme (FSCS), Money Advice Service (MAS) and the international regulators.

Both guides contain some common messages from the FCA which include the following:

  • Protect consumers and ensure market integrity by examining the areas that have an impact on them. This means looking at far more than systems and controls and compliance with the Handbook.

  • A firms’ commercial success should not come at the expense of customers getting products and services that meet their needs. The FCA will ask about the detail of a firm’s strategy and business plan and expect it to be able to show it how it assesses and mitigates the risks these generate.

  • An emphasis on understanding the culture within a firm – the way it conducts its business, what it expects of its staff and its attitude towards its customers.

  • A firms’ business processes, from product development to complaints handling, should be designed to give customers what they need and meet their expectations.

  • Firms’ systems and controls must be effective with independent controls, usually in the compliance, risk and internal audit functions that provide challenges to business units and assurances to senior management and the board that the group is operating as it should.

  • Senior management and the board should be able to explain clearly the conduct risks in their strategies and firms must be able to explain the way consumer and market-focused values are implemented.

FCA Enforcement


On 13 June 2019, the FCA addressed a Dear CEO letter to Wealth Management and Stockbroking firms setting out its view of the key risks of harm that firms could pose to their customers or the markets in which they operate.  The FCA outlined four key ways in which customer harm could occur in this sector:


  • By having reduced levels of savings and investments due to fraud, investment scams and inadequate client money, or assets controls;


  • By losing confidence in the industry’s ability to deliver their financial objectives due to mismanagement of conflicts of interest and market abuse (PLEASE LINK WITH MARKET ABUSE IN THE APPENDIX);


  • Through reduced levels of savings and investments due to order handling procedures and execution processes that do not deliver best outcomes; and


  • By being unable to understand the costs of services provided by firms, due to insufficient or inaccurate disclosure of costs and charges.


The FCA will expect all firms to consider how their activities could crystallise these risks and how best to mitigate them.  In most cases, the FCA bases its disciplinary action against firms on breach of one of its 11 Principles, rather than of a specific detailed rule. It is important to consider, therefore, what these Principles are:


1. Integrity:
A firm must conduct its business with integrity.

2. Skill, care and diligence:
A firm must conduct its business with due skill, care and diligence.

3. Management and control:
A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.

4. Financial prudence:
A firm must maintain adequate financial resources.

5. Market conduct:
A firm must observe proper standards of market conduct.

6. Customers’ interests:
A firm must pay due regard to the interests of its customers and treat them fairly.

7. Communication with clients:
A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.

8. Conflicts of interest:
A firm must manage its conflicts of interest fairly, both between itself and its customers and between a customer and another client.

9. Customers: relationships of trust:
A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.

10. Clients’ assets:
A firm must arrange adequate protection for clients’ assets when it is responsible for them.

11. Relations with regulators:

A firm must deal with its regulators in an open and co-operative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice.



FCA’s Principle Based Regulation

Principles-based regulation uses the broad set of principles of conduct set out by the financial services regulator. ... This differs from rules-based regulation which leaves less to the regulated parties to decide, and requires the regulator to set out a more specific rule book.  These principles are then left to regulated parties to decide how to most appropriately implement them.  The regulator’s approach to supervision will rely increasingly on principles and outcome-focused rules rather than detailed rules prescribing how outcomes must be achieved.  Firms will have increased flexibility in how they deliver the outcomes that the regulator requires, and many will find a closer fit between meeting their business objectives and meeting regulatory requirements. In addition to this, responsibility for key regulatory decisions will move to more senior levels, challenging firms’ compliance, risk management and internal audit functions as they provide the necessary support to senior management and boards.


For consumers, principles-based regulation will be of benefit by fostering a more innovative and competitive financial services industry. Principles-based regulation also offers effective protection as senior managers drive the changes necessary for their firms to meet the principles. UK consumers can play a role in achieving this as, over the long term, they become more financially capable.



Firm Systematic Framework (FSF)

The Firm Systematic Framework is designed to allow supervision to focus on key conduct risks in all types of firms.  The FSF considers each conduct risk in context to the potential harm to consumers, as well as the impact a risk could have on the market.  At the heart of the FSF, the FCA asks a simple question:


“Are the interests of customers and market integrity at the heart of how the firm is run?”


A FSF therefore assesses a firm’s business model, strategy, sales processes, post-sale, product design and governance culture.


The FCA supervision model is based on three pillars:


1.Firm Systematic Framework (FSF) – preventative work through structured conduct assessment of firms.

2.Event-driven work – dealing more quickly and decisively with problems that are emerging or have happened and securing customer redress or other remedial work when necessary – covering issues that occur outside the firm assessment cycle, utilising data better and improving monitoring and intelligence.

3.Issues and products – through fast, intensive campaigns on sectors of the market or products within a sector that are putting or may put consumers at risk.


This approach is driven by what the FCA calls ‘sector risk assessment’ – looking at what currently is and which may cause, poor outcomes for consumers and market participants. The risk assessment will use data analysis, market intelligence and input from the firm assessment process, as well as working closely with the FCA’s new policy, risk and research area.


In September 2015, the FCA published two guides that set out its new approach to the supervision of firms. Previously, the FCA used four categories (C1–C4) for its conduct classification of firms.  Now they are classified as either fixed portfolio or flexible portfolio. The majority of firms are classified as flexible portfolio and supervised through a combination of market-based thematic work and programmes of communication, engagement and education. The number of fixed portfolio firms are allocated a named individual FCA supervisor to be proactively supervised.


The FCA’s new approach to supervision is built on ten principles which form the basis of their interaction with firms of all categories:


  1. Ensuring fair outcomes for consumers and markets – this is the dual consideration that runs through all their work; how they will assess issues according to their impact on both consumers and market integrity.

  2. Being forward looking and pre-emptive – identifying potential risks and taking action before they have a serious impact.

  3. Being focused on the big issues and causes of problems where they will concentrate their resources on issues that have a significant impact on their objectives.

  4. Taking a judgement-based approach with the emphasis on achieving the right outcomes.

  5. Ensuring firms act in the right spirit, which means the FCA will consider the impact of their actions on consumers and markets rather than just complying with the letter of the law.

  6. Examining business models and culture and the impact they have on consumers and market outcomes. The FCA is interested in how a firm makes its money as this can drive many potential risks.

  7. An emphasis on individual accountability – ensuring senior management understand that they are personally responsible for their actions and that the FCA will hold them to account when things go wrong.

  8. Being robust when things go wrong – making sure that problems are fixed, consumers are protected and compensated and poor behaviour is rectified along with its root causes.

  9. Communicating openly with industry, firms and consumers to gain a deeper understanding of the issues they face.

  10. Having a joined-up approach – making sure firms receive consistent messages from the FCA. The FCA will engage with the PRA to ensure effective independent supervision of dual-regulated firms and work with other regulatory and advisory bodies, including the Financial Ombudsman Service, Financial Services Compensation Scheme (FSCS), Money Advice Service (MAS) and the international regulators.



Good customer outcomes

The basic premise is that consumers should buy products and services that meet their expectations from firms that they can trust.  The FCA’s current approach is to understand and assess the effectiveness of a firm’s governance and oversight of the product lifecycle - including how it is aligned to a firm’s culture and risk appetite - and the extent to which it delivers good customer outcomes. This is in contrast to the regulator’s historical focus (FSA) on point-of-sale outputs.


Consumer outcomes can only come from a fundamental cultural shift within firms – of a kind that cannot be driven by external forces, such as regulatory intervention or a legislative duty – but a cultural shift and direction from the “top”.  Rules are there to make sure “good customer outcomes” are delivered; the how is done to individual firms.


Product governance as a part of the FCA’s conduct risk management framework. Creating and maintaining effective product governance systems is key to both good customer outcomes and regulatory adherence; helping to deliver sustainable and “good” profits, customer retention and satisfaction for both parties. 


Good conduct can be seen as not simply about ensuring customer satisfaction, but delivering a good outcome for the customer. This goes beyond process and procedure – good conduct aims to deliver value for the customer and the shareholder with a balance of customer outcome and profitability.  It encompasses the client outcome and how organisations align their interests with the customers’ long-term interests as per TCF requirements - embedding the customer at the heart of the organisation.


Please contact Governance Connect for more information ( on how to set up and run a Product Governance process and how to have effective investment performance and risk oversight.

Governance Connect

Governance Connect was set up by Matthew Priestley with over 20 years’ experience in the asset management industry spanning front to back wealth management experience:


  • Regulation: Holistic understanding and application of the rules, as opposed to just complying with them, as per working through a Section 166

  • Investment Management: Process reviews and advice – experience from setting up a portfolio management team (£4.2bn FUM) and reviewing various delegated asset managers’ Investment Process and Risk Management Policy documentation

  • Investment Risk: from managing assets, working for an Authorised Corporate Director and heading up an Investment Oversight Management team monitoring various multi-asset class propositions, in terms of Commitment Approach, VaR and various key risk indicators (Sharpe, Beta, Asset Allocation, OCF, Performance, Volatility / Standard Deviation and Information Ratio

  • Operations: practical experience from working for Banks, Wealth Managers, Asset Managers and an Authorised Corporate Director, including carrying daily monitoring and annual due diligence reviews

  • FCA compliance and product launches: Worked with clients to launch products and get sign-off from the FCA in terms of Product, Prospectus, Investor Profiles, Target Markets and Stress Tests.



Liquidity Risk

Asset side liquidity refers to the ability to sell assets with acceptable costs within an acceptable timeframe in order to liquidate investments when needed to satisfy portfolio decisions and redemptions (liability side).  Liquidity risk is monitored through an assessment of the individual securities, market place, exchanges, investor and fund profile (structure) versus expected and trend levels of redemptions.



Market Abuse

This covers anything that damages investment confidence and/or integrity of the financial markets, such as insider dealing which creates an unfair market place for the other people undertaking it.


The Code of Market Conduct provides guidance on FCA’s implementation of the Market Abuse Regulations. It offers assistance in determining whether or not behaviour amounts to market abuse. The Code applies to all who use the UK financial markets.


Market Abuse regulation

Market Abuse Regulation (MAR) and the Market Abuse Directive (MAD) II are designed to improve confidence in the integrity of European markets, increase investor protection and encourage greater cross-border co-operation.  MAR makes insider dealing, unlawful disclosure, market manipulation and attempted manipulation civil offences and gives the FCA powers and responsibilities for preventing and detecting market abuse.


The scope is extended to include all financial instruments admitted to trading on a multilateral trading facility (MTF) or an organised trading facility (OTF).  It also applies to financial instruments where the price or value depends on or has an effect on the price or value depends on a financial instrument trading on a regulated market (RM), MTF or OTF.


MAR recognises that inside information can be legitimately disclosed to a potential investor in the course of market soundings in order to measure interest in a potential transaction, its size or pricing.  However, MAR adds requirements on firms to establish a framework for persons to make legitimate disclosures of inside information and imposes detailed record-keeping requirements in the course of market soundings.


Stabilisations and buy-back transactions

Stabilisations must be carried out for a limited period; relevant information about the stabilisation must be disclosed and adequate limits regarding price must be disclosed prior to the start of trading; trades must be reported to the relevant competent authority as being part of the programme and subsequently disclosed to the public and adequate limits regarding price and volume must be respected.


Algorithmic and high-frequency trading

Some are expressly forbidden.  Furthermore, any person(s) involved in design or coding of algorithms that are manipulative or abusive are within scope.


Investment recommendations

Persons producing or disseminating investment recommendations are required to ensure information is objectively presented and to disclose any conflicts of interest.  Investment recommendations will also include sales notes and re-dissemination of research.


Suspicious Transaction and order reports (STORs)

Extended to cover suspicious orders as well.


Market abuse covers:

The behaviour is based on information that is not generally available to those using the market and if it were available, it would have an impact on the price of securities and hence distort the market place.

That behaviour would likely give a false or misleading impression of the supply, demand or value of the securities concerned.

Behaviour which could constitute market abuse


1. Insider dealing - an insider deals or attempts to deal in qualifying investments or related investment on the basis of inside information relating to the investment in question;

2. Improper disclosure – an insider discloses inside information to another person otherwise than in the proper course of the exercise of his employment, profession or duties;

3. Manipulating transactions – trading, or placing orders to trade, that gives a false or misleading impression of the supply of, or demand for, one or more investments, raising the price of the investment to an abnormal or artificial level

4. Manipulating devices - behaviour which consists of effecting transactions or orders to trade which employ fictitious devices or any other form of deception or contrivance;

5. Dissemination – behaviour which consists of the dissemination of information that conveys a false or misleading impression about an investment or the issuer of an investment where the person doing this knows the information to be false or misleading; or

6. Misleading behaviour and distortion - which gives a false or misleading impression of either the supply of, or demand for an investment; or behaviour that otherwise distorts the market in an investment. 


Penalties can vary from public censure to imprisonment. 


For further information please see the Code which is located in the FCA Handbook.  Code of Market Conduct


Market abuse examples include

Improper disclosure - Where an insider improperly discloses inside information to another person

Misuse of information - information that is not generally available but would affect an investor’s decision about the terms on which to deal

Distortion and misleading behaviour – that gives a false or misleading impression of either the supply of, or demand for, an investment; or behaviour that otherwise distorts the market in an investment.


For further understanding see Transaction reporting, which came about over regulators trying to minimise Market Abuse.



Misleading Statements

The FSMA 2000 (Misleading Statements and Impressions) Order brought about the following three new criminal offences:


  • making false or misleading statements (section 89 of the 2012 Act)

  • creating false or misleading impressions (section 90 of the 2012 Act), and

  • making false or misleading statements or creating false or misleading impressions in relation to specified benchmarks (section 91 of the 2012 Act).


The first two offences together largely replicate the now-repealed FSMA section 397 offence and the defenses available under it. However, the misleading impressions offence is now wider in scope and covers recklessly created misleading impressions, as well as those created intentionally. The new offences can also be pursued with the less burdensome hurdle of demonstrating an intention to create a gain, loss and/or the risk of exposure to loss (rather than having to demonstrate an intention to “induce another”). The new section 91 offence has been introduced as a result of the recommendations made in the final report of the Wheatley Review of the London Interbank Offered Rate (LIBOR). The only benchmark to which this new offence currently applies is LIBOR.



Portfolio Risk

Risk related to regulatory / prospectus investment breaches (related to concentration of investment, lack of diversification and ineligibility of instrument, breaching the investment strategy).



Presumption of Responsibility (Reasonableness’ Test)

When a regulatory breach occurs within the business, senior management will be deemed to have breached their own personal responsibilities and duties within the business. Whilst the original regulatory legislation would have meant that the onus was on senior management to satisfy the regulators that they took ‘reasonable steps’ to prevent the breach from occurring, this key duty has been temporarily suspended pending a new legislation bill being passed through parliament.


The new requirements will be a ‘reasonableness’ test for senior managers to prove that they took all relevant steps to prevent any breaches from occurring.  When a regulatory breach occurs, the regulators will use the statement of responsibilities and responsibilities map to identify the relevant individual responsible.


Presumption of Responsibility Test

Presumption of Responsibility Test, which requires all managers to prove that they took all relevant steps to prevent any breaches from occurring.



Principle-based regulation

The FCA sees real benefits for consumers in tipping the balance of regulation more towards principles and away from prescription (tick-boxes). A more principles-based approach helps to align good business practices in firms and markets with the FCA’s statutory objectives.  As part of the move towards a more principles-based approach, it helps the FCA to avoid introducing many more detailed rules.  Instead the FCA wants firms and their senior management to focus on the principles and the outcomes for consumers, through such “lenses” as behavioural finance – no more negative business practices from the likes of payday lenders, who would only target those who could not afford to pay back their loans.



Principles of Business – 11 (FCA)

1. Integrity

A firm must conduct its business with Integrity.

2. Skill, care and diligence

A firm must conduct its business with due skill, care and diligence.

3. Management and control

A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.

4. Financial prudence

A firm must maintain adequate financial resources.

5. Market conduct

A firm must observe proper standards of market conduct.

6. Customers' interests

A firm must pay due regard to the interests of its customers and treat them fairly.

7. Communications with clients

A firm must pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading.

8. Conflicts of interest

A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.

9. Customers: relationships of trust

A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.

10. Clients' assets

A firm must arrange adequate protection for clients' assets when it is responsible for them.

11. Relations with regulators

A firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonable

Regulatory Structure

Reputational Risk

Potential loss resulting from damages to a firm’s reputation through bad processes / action / mistakes / bad news / bad image / conflict of interest, corporate governance and legal issues.



Risk Management Policy (RMP)

To define risks, how they are monitored and reported.  Each business area should explain how it understands its risks, monitors and reports them.  For investment management as an example it would explain what kind risks financial products could be affected by, such as Interest rates or how certain asset classes are monitored, such as Derivatives.  There would also be explanations on Liquidity, Leverage and VaR monitoring.  Compliance would mention the risk of personal account dealing and therefore how that is monitored.  Any risk management models should be explained in terms of the underlying methodologies used.   All departments should be covered in a RMP, which would show and explain all the firm’s risks.  This can be further enhanced with a firm having an ICAAP.


All AFMs need to have a Risk Management Policy (RMP) as per COLL 6.12.3R : An authorised fund manager of a UCITS scheme… must use a risk management process enabling it to monitor and measure at any time the risk of the scheme’s positions and their contributions to the overall risk profile of the scheme.


The RMP (COLL 6.12) should explain guidelines, procedures and how actions are recorded and resolved.  It should be consistent with the risk management strategy, high light the firm’s risk appetite, how it makes sure that it only takes on suitable business and any committees should be mentioned that help with the overall risk management within the firm.  The RMP should therefore provide a framework that helps the whole business (and employees) to be aware of all the risks that they are likely to face and what controls should be in place. 


It is useful to understand Prince2 here – “Risk Management Approach Document”.  The RMP should be able to explain how a firm is going to manage the risks:


  • The goals of applying risk management

  • The procedures that will be adopted, such as using a risk register

  • The roles and responsibilities, such as of committees and departments involved

  • Any risk tolerances, such as percentage levels (bands) of complaints (firm’s risk appetite) and VaR levels

  • Timing of risk management activities, such as how often committees will meet, how often liquidity will be monitored

  • Tools and Techniques used

  • Reporting requirements


Note a risk register is a repository of all the risk information logged to be able to track identified risks, the action taken, dates and responsibilities.


Prudential Regulation and ICAAP reports are to ensure firms manage their business conduct effectively.  A risk management framework (RMP) should adhere to regulator expectations and is effective in defining business strategy.  That should inform on the firm’s risk appetite to provide greater clarity to senior management and staff in their awareness of roles and responsibilities, including:


  • Risk identification

  • Measurements

  • Assessment

  • Monitoring and

  • Controlling of Risks



Section 166

A s166 notice is a notice issued by the Financial Conduct Authority (FCA) under s166 of the Financial Services and Markets Act 2000 requiring a firm to carry out a “skilled person review”. The FCA serves around 50 a year.


A Section 166 usually comes about due to the FCA seeing and being reported to about a number of risks, issues and failings of a firm.  It therefore forms a picture of the firm in question “losing oversight and control of its business”.  Usually under a S166 the FCA can instruct the firm to cease soliciting any new business in the affected areas.


A skilled person review is an independent review of a regulated firm, usually focusing on specific issues where the regulator wishes to delve deeper into a firm’s activities. The report will generally establish the extent of any problems and/or the degree of any customer detriment and required remedial action. The skilled person review may be used by the FCA to determine the ongoing supervisory relationship that the FCA has with the firm, and/or whether the FCA will undertake any enforcement action against the firm.


It is the FCA that commissions the report, but the FCA will nominate, or ask the firm to nominate (with the agreement of the FCA), a skilled person to undertake the skilled person review. The costs of the skilled person review are generally borne by the regulated firm, and may be substantial.



Senior Management Arrangements, Systems and Controls (SYSC 3)

The FCA and the PRA require all firms to take reasonable care to establish and maintain such systems and controls as are appropriate to their business. Clearly, the nature and extent of these appropriate systems and controls will depend on a variety of factors, such as the nature, scale and complexity of the business, geographical diversity, the volume and size of the transactions undertaken, and the degree of risk associated with each area of business operations.


A firm’s reporting lines should be clear and appropriate, having regard to the nature, scale and complexity of its business. These reporting lines, together with clear management responsibilities, should be communicated as appropriate within the firm.


When functions or tasks are delegated, either to employees or to appointed representatives or, where applicable, its tied agents, appropriate safeguards should be put in place. The firm must assess whether the recipient is suitable to carry out the delegated function or task, taking into account the degree of responsibility involved. Limitations of the delegation should be made clear to those concerned. The firm must agree at the outset, arrangements to supervise delegation and to monitor the discharge of delegates’ functions or tasks.


Firms cannot contract out their regulatory obligations, so, for example, under Principle 3 a firm must take reasonable care to supervise the discharge of outsourced functions by its contractor. A firm must take suitable steps to obtain sufficient information from its contractor to enable it to assess the impact of outsourcing on its systems and controls.


An overseas bank must ensure that at least two individuals effectively direct its business.


A firm which carries on designated investment business with, or for retail clients or professional clients must allocate to a director or senior manager the function of:


a. having responsibility for oversight of the firm’s compliance

b. reporting to the governing body in respect of that responsibility.


Compliance means compliance with the rules in:


a. COBS (Conduct of Business Sourcebook)

b. COLL (Collective Investment Schemes Sourcebook)

c. CASS (Client Assets Sourcebook).

Senior Managers and Certification Regime

The Senior Managers & Certification Regime (SM&CR) is designed to create a formal link of accountability between individuals and the conduct of the firm.  The complexity, governance risk and accountability that the SM&CR imposes on firms can be summed up by the consequences and the risk to senior managers of personal fines and damage to their reputation by not being able to demonstrate the appropriate controls are in place and being monitored.


The idea behind the SMCR from the FCA is for all firms to map responsibilities.  The map

depends entirely on the complexity and size of your firm. The map is to provide a single, self-contained overview of your firm’s governance, including who is responsible for what. Would your map adequately explain your firm to someone who doesn’t work for you?


Individual Accountability and Conduct Risk

In March 2016, the FCA and the PRA introduced the Senior Managers and Certification Regime (SM&CR), so as to increase individual accountability.  The rules are intended to make it easier for firms and regulators to be clear about who is responsible for what.  


Under these requirements:


  • each senior manager has a statement of responsibilities setting out the areas for which they are personally accountable

  • firms must create a 'responsibilities map' which knits these responsibilities together

  • all senior managers are pre-approved by the regulators before carrying out their roles

  • senior managers in the banking sector should be subject to a ‘duty of responsibility’. This means they must take reasonable steps which a person in their position should take in order to prevent a regulatory breach from happening.


SMCR and Conduct Risk are complimentary and have overlaps but there are significant differences. SMCR pronounces regulatory principles and requirements which must be followed. Alternatively, a Conduct Risk Framework provides a proactive bespoke method to manage Conduct Risk by using a tailor-made method for assessing material Conduct Risk sub-types and their corresponding Conduct Risk key Internal Controls (for adequacy & effectiveness) as well as considering the applicable Conduct Risk drivers (regulatory and FI-specific) and the related Conduct Risk key risk drivers.


Certification Regime. This applies to ‘material risk-takers’ and other staff who pose a risk of significant harm to the firm or any of its customers.  Assessed them as fit and proper by 7 March 2017. Firms must also have procedures in place to re-assess the fitness and propriety of certified staff on an annual basis.




Systems and Controls – framework

Please feel free to contact to see how a Due Diligence health check and review can help. 


For a high-level table of the main areas that need to be covered under the FCA’s SYSC please email

Strategic Risk

Risk related to the fund’s investment strategy, business model, specific and focused exposure, methods used for exposure (country specific risk, instruments used etc)


Systems and Controls – framework

Please feel free to contact to see how a Due Diligence health check and review can help. 


For a high-level table of the main areas that need to be covered under the FCA’s SYSC please email



Transaction Reporting

The scope of transaction reporting to the FCA is increased significantly by MiFID II and the amount of detail required in the reports is markedly greater. In addition, many buy-side firms that have not previously had to report to the FCA will be obliged to do so.


What is transaction reporting for?

MiFID I, which came into force in 2007, represented the European Union’s (“EU”) first attempt to regulate financial markets and it introduced, for the first time, a harmonised transaction reporting regime across the EU. In MiFID II, the European Commission (“EC”) takes the current objective of transaction reporting - the detection and investigation of potential market abuse and expands it into supporting “market integrity”. The proffered definition - “monitoring the fair and orderly functioning of markets” - is no more precise but the new approach is perhaps better illustrated by specific new areas of focus:


  • the identification of waivers for large orders and illiquid instruments,

  • short selling and the application of commodity derivatives.


The proposed amendments to transaction reporting are contained in MiFIR - a regulation2, meaning that these have direct force across the EU without the possibility of national differences in implementation.


Transaction Reporting

The recast Markets in Financial Instruments Directive (MiFID) and accompanying Markets in Financial Instruments Regulation (MiFIR) (together MiFID II) is one of the largest regulatory undertakings in the history of financial markets.  This effects some important changes for Financial Services Firms including MiFID Managers and Brokers and Dealers in relation to Transaction Reporting.  The original Markets in Financial Instruments Directive of November 2007 (MiFID I) established the transaction reporting regime, however the obligation is now enshrined in MiFIR (and thus applicable directly without need for FCA rule-making). The scope of the reporting requirements has been significantly expanded in terms of both instruments and required data; meeting the obligations is likely to be a significant challenge for all firms executing transactions.


The obligation to report transactions was initially introduced to assist National Competent Authorities (NCAs) detect and investigate market abuse; for the FCA, this supports their operational objective to protect and enhance the integrity of the UK financial system. MiFIR has not changed this fundamental purpose and, indeed, has extended the requirement for NCAs to include the monitoring of fair and orderly functioning of markets within their remit as well as observing the activities of investment firms. This is consistent with broader regulatory changes, such as Market Abuse Regulation (MAR) that seeks to enhance the integrity of financial markets. The submission of complete and accurate reports is therefore of the utmost importance.


The meaning of ‘transaction’ is very broad. It covers the sale and purchase of reportable instruments as well as other types of acquisition and disposal in which there is the potential for market abuse. The Regulatory Technical Standards accompanying the reporting requirements (RTS 22) exclude a number of activities from the definition of ‘transaction’, such as transactions arising for clearing and settlement purposes.


Under MiFID I, the reporting requirement arises only where transactions are executed on EU Regulated Markets, which was extended by the FCA’s Rules in SUP 17 to include Prescribed Markets. MiFIR transaction reports will be required for all transactions that have been executed in financial instruments where the instrument has been admitted to trading on an EU Regulated trading venue, where the underlying instrument references such, or where an admission request has been made. The extension of the application to EU Regulated trading venues brings into scope those transactions executed on Multilateral Trading Facilities (MTFs) and Organised Trading Facilities (OTFs). The consequence of this extension is an expansion of reporting requirements in the non-equity space, particularly instruments currently traded off-exchange such as many bonds and derivatives.


The European Securities and Markets Authority (ESMA) will maintain a publicly accessible list of all reportable instruments within a new Financial Instrument Reference Data (FIRD) system, which will collect information on a daily basis from approximately 300 trading venues across the EU.


RTS 22 also specifies what constitutes ‘execution’ by an investment firm which includes, among other activities, dealing on own account, executing orders on behalf of clients and making an investment decision in accordance with a discretionary mandate given by a client. Transmission of an order to another counterparty, in particular circumstances, is not considered execution.


It is important that firms fully understand how their business activities map to the requirements and detail of their reporting obligations.


The volume of data that must be reported has almost trebled to 65 fields.  The fields containing the fundamental details of the transaction are unchanged but a number of new data requirements have been added to enable NCAs to have full access to records at all stages in the order execution process for their market monitoring. These new fields include those to identify the buyer or seller, the execution trader and the identity of any decision maker – a portfolio manager or an algorithm. Identification of natural persons requires full names, dates of birth and national identifiers, which are (jurisdiction depending) either national identifiers, passport or national identity card numbers or a prescribed concatenation of name and date of birth. Any entity that is a counterparty to a transaction will have to be identified using a valid, current and appropriately assigned Legal Entity Identifier (LEI) and firms are prohibited from providing a service that would trigger a transaction report without first obtaining this code from the counterparty. The way in which trading capacities are reported is changing from ‘Agent’ and ‘Principal’ to ‘DEAL’ (dealing on own account), ‘MTCH’ (matched-principal) and ‘AOTC’ (any other capacity) and details of any applicable waiver are required. There are also fields to include an indicator which relates to short-selling transactions, or OTC post-trade, Commodity derivatives or Securities Financing transactions.


The concession under MiFID I where UK investment managers were able to rely on their brokers to submit transaction reports to the FCA on their behalf is no longer applicable and has been replaced by the so called ‘transmitting firm‘ exclusion. This applies where a firm that communicates an order will be permitted to rely on a counterparty (the ‘receiving firm’) to make transaction reports but only where there is express agreement between the two parties that the receiving firm will report all the details of the transaction.


In addition to express agreement, the transmitting firm must supply the specified order details contained in Article 4 of RTS 22, which include items such as instrument identification code, direction, price, quantity, client details and decision maker details. The receiving or reporting firm is also obliged to review and validate the order details for errors or gaps before submitting a transaction report.


Brokers will need to consider if they wish to accept contractual responsibility for reporting on their clients’ behalf and if they have the IT systems capable of collecting and reporting the Order Details they receive and investment managers will need to ensure they are capable of transmitting all the details in a timely fashion to enable the receiving firm to comply with the T+1 reporting requirement.


If firms are submitting transaction reports under the European Markets Infrastructure Regulation (EMIR) which contain all the required information to satisfy their MiFIR obligations, and the Trade Repository (to whom those reports are submitted) is also an Approved Reporting Mechanism (ARM), then MiFIR provides that the obligation has been complied with. The practical application of this remains to be seen.


Transaction Reports under MiFIR can be submitted to NCAs directly or via an ARM or trading venue and must be submitted as quickly as possible, but not later than close of the following day. In the UK the concept of an ARM is not new and the FCA currently only accept transaction reports via ARMs.


Accuracy and completeness of transaction reports is paramount and firms must have in place arrangements to ensure this, which include regular testing and reconciliation of the reporting process. ESMA has recently published its final Guidelines on Transaction Reporting, Order Record Keeping and Clock Synchronisation under MiFID II (aka EuroTRUP) to assist the industry in meeting its obligations. These guidelines are a comprehensive guide for Investment Firms, Trading Venues, ARMS and NCAs on compliance with the relevant provisions of MiFIR and ‘are designed to ensure consistency in application’ [1]. The EuroTRUP is focused on the construction of transaction reports in various trading scenarios and, although not exhaustive, encourages firms to apply the ‘elements of the most relevant scenario to construct their records and reports.’


For those firms that have existing infrastructure for MiFID II and EMIR reporting with respective connections to an ARM and a Trade Repository, the transition to MiFID II transaction reporting could be an incremental upgrade, albeit one that requires new integration with personnel or CRM systems for trader identification. However, for firms who previously relied on their sell-side brokers to report transactions but are now obligated to do so themselves, the operational burden will be greatest. The complexity of the MIFID II data rules, the submission format, the timeliness of the submission and the accuracy of items such as date-time stamps (via clock synchronisation) all stack up to a point that a manual process is not viable and an automated technical solution must be employed. This is a significant undertaking for any firm.


the firm would need to report only when it executes/concludes a transaction in the four scenarios described below:


(a) off-venue bilaterally (ie. at a negotiated or accepted price), when selling to another MiFID firm that is not a systematic internaliser;

(b) off-venue bilaterally, in either direction with a non-MiFID firm that does not have an obligation to make the trade public under its local regime (see below)

(c) directly on a third country venue that is not subject to a comparable transparency regime per the ESMA opinion of 15 December 2017 (ESMA70-154-467

(d) as an internal cross between two or more of its own clients.


The only change concerns bilateral trades with third country (non-MiFID) counterparties, where previously we would have advised that the firm should report.


Since then, however, the FCA has indicated to a member and then confirmed to the IA (05/02/2018) separately, that it would not be concerned if a firm did not report a trade that had been reported by its counterparty under their local regime.


The FCA acknowledges that ESMA has so far talked only of trades executed on third country venues and may consider such trades to be reportable under MiFIR, but is not supportive of a regime that would result in the same transaction being made transparent multiple times across jurisdictions.


Which financial instruments need to be reported?

Under MiFID I, transaction reporting applies only to financial instruments3 admitted to trading on a regulated market, plus any OTC contract which derives its value from any such instrument. MiFID II broadens the scope of transaction reporting to capture: i. Financial instruments admitted to trading or traded on an EU trading venue or for which a request for admission has been made. “Trading venues” now include Multilateral Trading Facilities (“MTF”), the new category of Organised Trading Facilities (“OTF”), the likely home for OTC derivatives subject to the trading obligation, as well as regulated markets. ii. Financial instruments where the underlying instrument is traded on a trading venue. This essentially widens the scope to capture all OTC transactions in such instruments. iii. Financial instruments where the underlying is an index or a basket composed of instruments traded on a trading venue. This means that just one component of either an index or basket will bring that financial instrument under the reporting obligation. Note that the transaction does not actually need to have been executed on an EU trading venue. Hence, for example, derivatives traded outside the EU where the underlying is traded on an EU trading venue will have to be reported.


What is a “transaction”? The proposed definition of a transaction covers the “acquisition, disposal or modification” of a reportable financial instrument, including but not limited to:


• A purchase or sale (this is the current MiFID I definition);

• A simultaneous acquisition and disposal where there is an obligation to publish post-trade, even if there is no change of beneficial ownership (e.g. when exercising options); and

• The entering into or closing out of such an instrument.


Exclusions from the definition of transactions include:

• Securities financial transactions (e.g. stock lending, repurchase agreements);

• Post-trade assignments and novations in derivatives;

• Portfolio compressions;

• The creation, expiration or redemption of instruments resulting from pre-determined contractual terms or mandatory events where no investment decision is occurring; and

• A change in the composition of an index after a transaction has taken place.


“Execution” is also a distinct concept in the new regime - defined as any action that results in a transaction. In other words, the transaction is the outcome; the execution is the activity that results in that outcome.

Treating Customers Fairly (TCF)

  • Outcome 1: Culture

  • Outcome 2: Products and services

  • Outcome 3: Clear information

  • Outcome 4: Suitability

  • Outcome 5: Products meet expectations

Outcome 6: No unreasonable post sale barriers to change product, switch provider, submit a claim or make a compliant

UN Sustainable Development Goals (SDGs - 169)

Objectives to tackle issues, such as Climate Change, Poverty, Ocean Pollution and Gender Inequality by 2030.  This are from a development point of view as opposed to investment.  The SDGs call for a deep transformation of economic activities to align them with sustainable development, thereby presenting opportunities for solution providers in the private sector and their investors.


The issue is that some in the wealth industry have just inserted these into their investment process from an investment opportunity perspective.  It is therefore important to understand the SDG goal, SDG target and impact risks, e.g. some recycling processes have a high environmental impact, especially when factoring in energy needs, which may be less attractive than using virgin materials in some cases.  As an example, according to the IEA, energy efficiency improvements are the biggest contributor to CO2 emissions.  There are also the execution risks to consider, such as disposal of non-recyclable materials, which need to be handled carefully in order to not generate pollution. In addition, Stakeholder participation risks, which consider the working conditions of staff and contractors may be problematic, especially in terms of health and safety.  That therefore can limit the actual investment opportunities from public markets. 


Client Change

The world must invest $2.4tn in the energy system every year through 2035 to limit global warming to 1.5 degrees Celsius, according to the Intergovernmental Panel on Climate Change.  



VaR (for a fund’s global exposure)

A global exposure calculation using the VaR approach should consider all the positions of the UCITS and the maximum limit set according to its defined risk profile, as mentioned in the Risk Management Policy.


Selecting the VaR approach

The UCITS may use the relative or absolute VaR approach.  The UCITS must also be able to demonstrate at all times that its chosen VaR approach is appropriate to its risk profile and investment strategy and this must be fully documented.


1. Relative VaR Approach


1. VaR of the UCITS’ current portfolio (including financial derivative instruments);

2. Calculate the VaR of a reference portfolio (or benchmark)

3. Check that the VaR of the UCITS portfolio is not greater than twice the VaR of the reference portfolio to ensure a limitation of the global leverage ratio of the UCITS to:


(VaR UCITS – VaR reference portfolio) X 100 = Less than 100%

                                VaR reference portfolio


The reference portfolio should be unleveraged and should not contain any financial derivative instruments, except that:


  1. A UCITS engaging in a long/short strategy may select a reference portfolio, which uses financial derivative instruments to gain the short exposure or

  2. A UCITS which intends to have a currency hedged portfolio may select a currency-hedged index as a reference portfolio


The risk profile of the reference portfolio shall be consistent with the investment objective, policies and limits of the UICTS portfolio.


If the risk/return profile of a UCITS changes frequently or if the definition of a reference portfolio is not possible then the relative VaR approach must not be used.


2.Absolute VaR Approach

The absolute VaR of a UCITS shall not exceed 20% of its net asset value.


The calculation of the absolute or relative VaR:


  1. One tailed confident interval of 99%

  2. Holding period equivalent to one month (20 business days)

  3. Effective observation period of risk factors of at least 1 year (250 business days) unless a shorter observation period is justified by a significant increase in price volatility through extreme market conditions;

  4. Quarterly data set updates, or more frequent when market prices are subject to material changes;

  5. At least daily calculation


A confidence interval and a holding period differing may be used by the UCITS if the confidence interval is not below 95% and the holding period does not exceed one month (20 business days).


UCITS using the absolute VaR approach shall, when using other calculation parameters, rescale the 20% limit to the particular holding period and confidence interval.  The rescaling shall only be an option if it is based on the assumption of a normal distribution with an identical and independent distribution of the risk factors by comparing to the quantiles of the normal distribution and the square root of time rule.


Back Testing VaR

The UCITS shall monitor the accuracy and efficiency of its VaR approach by conducting a back-testing programme.  For each business day a comparison of the one-day VaR measure for the portfolio’s end of day positions to the one-day change of the portfolio value by the end of the subsequent business day. 


The UCITS should monitor any over shootings.  An over shooting shall be a one-day change in the portfolio’s value that exceeds the related one-day VaR measure.  If a percentage of over shootings appears to be too high, the UCITS shall review its VaR approach and make appropriate adjustments.


The senior management of the UCITS shall be informed at least on a quarterly basis and the regulator on a semi-annul basis if the number of over shootings for the most recent 250 business days exceeds 4 in the case of a 99% confidence interval.  If the number of over shootings is too high and the measures taken by the management company are not sufficient to improve the quality of predictions of the VaR approach then the management company shall take further measures and in particular apply stricter criteria to the use of the VaR approach. 

Stress Tests of the VaR


1.Stress Testing – general provisions

The stress tests shall be adequately integrated into the risk management process and the results shall be considered when making investment decisions.


2.Quantitative Requirements

The Stress Tests shall cover all risks which affect the value or fluctuations in value of a UCITS.  In particular, those risks which are not fully captured by the VaR approach shall be taken into account.


The stress tests shall be appropriate for analysing market situations in which the use of significant leverage could potentially lead to the default of the UCITS


Stress tests shall focus on those risks which though not significant under normal conditions might become significant in stressed situations, such as the risk of unusual correlation changes, the liquidity of markets in extreme situations or complex structured products with liquidity problems.


3.Qualitiative Requirements

Stress Tests – on a regular basis, at least once a month.  Additionally, whenever a change in the value or the composition of a UCITS or a change in market conditions makes it likely that the test results will differ significantly.


A program for carrying out stress tests shall be developed on the basis of such guidelines for each UCTS.  It shall be explained why the program is suitable for the UCITS.  Completed stress tests together with their results shall be clearly documented in writing.  Reasons shall be given for any changes or deviation from the program.


4.Risk Management Function

The risk management function shall perform ongoing review of the VaR approach in order to ensure the accuracy of the calibration of the VaR approach.  Adequate documentation:


i. the risks covered by the approach

ii. the methodology

iii. the mathematical assumptions and foundations

iv. the data used

v. the completeness and accuracy of the risk assessment

vi. the methods used to validate the approach

vii. the back-testing processes

viii. the stress testing processes

ix. the validity range of the approach and

x. the operational implementation



Value for Money

Value for money can mean different things, depending on a scheme’s priorities. For some, it can include activities to enhance member communications. Others might want to better reflect their workforce’s beliefs by including, for example, sustainable investing and some just might see it as performance and meeting investors’ expectations.


A simple value for money definition could be about achieving your goals in the most cost-effective way. You first need to understand what you want to achieve and then compare different solutions to see which will deliver your objective cost effectively.


Regulators at both the EU and UK are seeking to clamp down on poor value offerings through scrutinising governance and investor disclosures.  To this end, the FCA requires authorised fund managers (AFMs) to assess the value for money of each fund, take corrective action if it does not offer good value for money and explain the assessment annually in a public report.  Has there been a fair exchange of money (fees)?


Moreover, under the Senior Managers and Certification Regime (SM&CR) prescribed responsibility, a senior individual will be required to take “reasonable steps” to ensure that the AFM carries out the assessment of value and acts in the best interests of fund investors.


For value for money assessments to be effective they need to be integrated into a firm’s overall product governance process, including in pre-launch reviews and regular post-launch assessments. Value for money is integral to many of the product governance elements required under MiFID II and PRIIPs, including identifying a target market which would derive value from the product, setting a distribution strategy to reach that target market, scenario analysis to identify the risks of poor outcomes for clients, assessment of the impact of costs and charges on the product’s expected return, and the transparency of the charging structure.

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