Beam me up, Mr. Wheatley

“I want the FCA to be less like Mr. Spock, and more like Captain Kirk”.

So said FCA CEO Martin Wheatley, speaking in April in his first speech after the FCA took on its full powers from the old FSA.

What does that mean? That FCA wants to be more flexible, more “touchy-feely”, more intuitive about the interests of retail customers, especially when it comes to what those customers understand and why they buy.

This approach, and FCA’s use of “behavioural economics”, promises to fundamentally alter the nature of the relationship between the firm and its customer, and between the firm and the regulator.

To read more about this new approach, see our article “Regulation, Jim, but not as we know it” in the June issue of Compliance Monitor by clicking here.

Unregulated Collectives – None but the brave…

The recently released FCA Policy Statement PS03/13 “Restrictions on the retail distribution of unregulated collective investment schemes and close substitutes” contained an unwelcome surprise for discretionary fund managers.

As anticipated, PS03/13 dramatically blocks the avenues along which these products can be promoted. In the broadest terms, these are now only available to professional customers and high-net worth and sophisticated individuals.

Discretionary managers might previously have taken comfort from FCA Chief Executive Martin Wheatley’s words of 25 September 2012, spoken shortly after the release of what were then FSA’s proposals, when he said “But we acknowledge that these schemes will be right for some people.

So even in this case we are not stopping everyone from being able to buy them. If you have a large, well-diversified portfolio, you are welcome to invest.”

This pragmatic approach has however not found its way into the new rules. Discretionary managers will henceforth be required to take account of FCA’s guidance that they “should exercise particular care to satisfy [themselves] that the transaction is suitable for the client and that it is in that client’s best interests, if promotion of the investment would not have been permitted.”

In other words, buy these for a retail discretionary portfolio on the same basis as if it were an advised sale.

Given the detailed steps that any such advisory sale now has to go through, together with the implicit assumption on FCA’s part that any such product in a retail portfolio will not be suitable, let alone “welcome”, it will in the future only be either the best run – or bravest – fund managers who continue to invest in these products for retail portfolios.

Not a price regulator?

Two months in and FCA is telling us how different a regulator it will be. You’re not convinced?

See the words of Clive Adamson, Head of Supervision and an FCA Board director at an Ashurst seminar on April 18.

“We’re not against firms making adequate returns to shareholders”, said Adamson. When asked to define what an “adequate” return might be, he declined to do so. Rather, he pointed to what he held out as the excessive returns on capital made by firms selling PPI at the height of their mis-selling. Had the FSA looked at those metrics then, the mis-selling might have been nipped in the bud.

The implication is clear – high returns may be indicative of malpractice. To this end, FCA will expect Boards to be all over their top-selling products – and FCA will itself be all over those same firms themselves.

“But we’re not a price regulator”, said Adamson. Providing that the firm has done what FCA considers to be the “right thing”, they’ll happily walk away.

The message for firms is clear – whatever size you are, make sure that you have documented as fully as possible your product approval procedure. FCA’s interest may not lead to their directing the price – but it will add massively to the cost.

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