This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
Financial Conduct Authority chief Martin Wheatley delivers a speech on financial services regulation and investment management in the UK
Good evening, it’s a great pleasure to be back in Hong Kong among old friends and colleagues.
To being with I would like to thank the Consul General Caroline Wilson for hosting this event and inviting me to speak and to the HK Investment Fund Managers Association and the Alternative Investment Management Association for assisting with arrangements.
I’ve been asked to talk a little bit about the direction of financial services regulation in the UK and particularly how this applies to the regulation of asset management.
But before I do I think it is worth reflecting on the importance of the Hong Kong’s Financial Services Sector to the UK and subsequently to us as the UK’s financial regulator.
- HK is the UK’s 5th biggest trade partner in financial services and 2nd only to the US outside of Europe
- it is a critical base for two of our largest banks, HSBC and SC
- the sector itself has a significant growth rate, something like 6% a year, and accounts for around 22% of HK GDP
- and it is the gateway to China, particularly in your industry - asset management - where the mutual recognition agreement with the mainland clearly set Hong Kong as the Chinese asset management hub.
As the UK regulator of Financial Services we can’t help but notice these developments. Because we regulate an international market our firms are active here, your firms are active in the UK. What’s happening in Hong Kong, Shanghai, Beijing, Nanjing and Shenzhen matters to us. And this is particularly evident in asset management.
The UK asset management industry currently has around 8.25TRN US Dollars under management – making it the second largest market in the world after the US. (Hong Kong has around 1TRN USD under management).
But importantly nearly half of the UK funds, so 3.2TRN USD, is managed for overseas clients which makes the UK the largest manager of overseas funds.
This reflects the strong history of expertise of the UK industry, the growing globalisation of finance and I would argue the strength of our regulatory regime, which I consider is critical to the sector and to which I will now turn.
The 2008 Financial crisis highlighted perhaps two key lessons for the UK.
- the need for consistent and coherent global regulation, and
- the importance of effective conduct and markets regulation to market confidence and integrity.
In response the UK Government established the FCA in April of last year. The FCA has dual objectives of protecting consumers and maintaining market integrity. We are the UK’s regulator of Primary and Secondary markets and of the conduct of all Financial services firms. We are broadly equivalent to a combination of the functions of the SFC here in HK, as well as the market conduct and consumer protection elements of the Hong Kong Monetary Authority (HKMA) and the Office of the Commissioner of Insurance (OCI).
But reform in the UK was not just about structural change it’s also about a change in regulatory culture; adopting a more proactive and forward looking approach to conduct regulation.
We are adopting this approach across all areas, including the asset and investment management sector. Here the importance of a robust regulatory framework is clearly evident. Asset management is an industry that relies on trust. Robust, clear and consistent regulation is critical to maintaining that trust, maintaining market confidence, market integrity and enabling the market to develop.
We have a multifaceted approach to the regulation of asset management and Financial Services in general. It covers the firms who operate, the senior people in those firms, the activities they undertake and the funds they operate or invest in. Our approach is to supervise the industry to act as good agents and look after the best interests of their clients. To do this we look at:
- how firms are structured, governed and resourced, and how they conduct themselves with others and their clients
- the individuals that operate within those firms to make sure they have the required expertise
- the funds they operate to ensure that investors know where funds are invested and that their assets are protected in the event of failure, and
- how firms manage conflicts of interest and importantly test how firms put the best interests of their clients first.
In October 2013 we outlined our Asset Management Supervisory Strategy. Broadly, our view is that the UK industry is meeting our expectations. However, our work has identified areas where improvements could be made. For example:
- we have some residual concerns about the transparency of commission charging which we expect our Retail Distribution Review to address
- we are particularly looking for firms to improve transparency in relation to on-going charging
- we also see a need for greater investor awareness and for investors to consider issues other than price;
- we have also initiated a public debate on whether research services and execution services need to be unbundled to provide better transparency of costs in the equity market, and
- we will be reviewing competition in the wholesale sector, including asset management industry as part of a Wholesale Strategic Review in the coming months.
We have also been busy internally.
- we have been working to improve the efficiency of our firm and fund authorisation process to ensure we better our statutory requirements of making decisions within 6 months.
- we have also been working with industry to gear up for implementation of the EU Capital Requirements Directive and Regulations, which implement a new capital regime for investment firms (alongside banks)
- we have also been implementing the EU Alternative Investment and Fund Markets Directive which establishes a new regime for the registration and regulation for alternative investment firms and amongst other things requires the registration of some 800 firms.
None of the issues above will sound unfamiliar to you. These are not uniquely UK issues and I am keen to discuss these with the local authorities because these issues need cross border consensus.
As a regulator we also recognise the importance of and benefit of cross border financial services activity. It helps spread risk, enhances competition and fosters innovation so the markets can continue to meet the needs of the economy. As such we, as you do in Hong Kong, intentionally operate a level playing field, a non-discriminatory regime.
One final point – It is not the job of the regulator to make successful investments; that role belongs to you here today. But it is the regulators job to ensure that whether you choose to invest via London or Hong Kong your investments are safe from malpractice.