Joint response from UKSA and ShareSoc 22 May 2023
One of the key roles of ShareSoc is to represent the interests of individual investors and we do this by campaigning and lobbying for improvements. Part of what we do on behalf of our members is to respond to consultations such as FCA DP23-2. In a detailed 30-page response, UKSA and ShareSoc made the following key points:
1 – We are pleased that the FCA is consulting on the UK regime for asset management with a view to updating and improving it. We are also pleased to be given the opportunity to make input to this.
2 – We have identified three very basic requirements if the UK regime for asset managers is to be improved. These are:
2.1. – The need for clarity – rules must be understandable to the investing public not just to the industry. This reflects the greatly increased emphasis on the consumer since the current rules were created.
2.2 – The need for consistency, proportionality, relevance and coherence when defining the information that should be given to consumers to help them make investment decisions. The shortcomings of the Key Information Document (Kid) are a reminder of just how easily objectivity and usefulness-to-the end-user can be lost in the output from the regulatory meat-grinder.
2.3 – Better recognition of the continuing impact of modern technology – both in the operation of the industry and on the regulatory and reporting regimes. This includes regulation of the technology itself as well as the scope to make better use of it.
3 – Achieving clarity for consumers.
3.1 – The ‘consumer’ or ‘consumers’ are mentioned over 70 times in the consultation. Despite this, and the fact that the FCA says that this consultation will be of interest to consumers who invest in funds and that it particularly welcomes feedback from consumers and potential consumers, the consultation is structured in a way that makes it difficult for consumers to provide meaningful input.
3.2 – Many of the issues raised in Sections 3 and 4 of the discussion paper are presented in a way which only those who are very familiar with functioning of the industry are likely to be able to comment on. For example, paragraphs 3.29 to 3.34 talk in very broad terms about the UCITS and NURS regimes and imply that, for a variety of reasons, they are no longer fit for purpose. There are indications that this is partly because they have evolved over time and the market for the investments they were originally designed to cover has changed. However, there is little clear analysis of what the main shortcomings currently are or how this is compromising consumers – possibly adding unnecessary cost to the investment process for consumers or generally failing to provide coherent regulation.
3.3 – Paragraphs 3.35 to 3.40 put forward a number of options for change. The pros and cons of these from a consumer point of view are not explained in a way that consumers are likely to be able to interpret and comment on.
3.4 – The fact that the Discussion Paper (DP) regularly refers to ‘consumers’ as if they are a homogeneous group while at other times referring to ‘professional’ investors and ‘sophisticated’ investors without any serious attempt to define or differentiate these groups makes the task of responding meaningfully to the DP even harder.
3.5 – As consumer oriented organisations, we have done our best to give meaningful feedback on the issues raised in the Discussion Paper. However, it has not proved easy. In many areas it has been impossible to decipher exactly what the main issues are, what might be done to address them and what the FCA is seeking to achieve apart from ‘better outcomes’ for all concerned.
4 – Technology issues.
4.1 – We agree that technology has become an essential part of financial markets and of the operating model of financial service firms. Technology cannot be siloed if ‘straight through processing’, i.e. digitisation, is the desired outcome. There must be a continuing drive to standardise technology and avoid a proliferation of bespoke systems. This is true for many other sectors of the economy. However, the comment in 5.2 that the commercial decisions that firms make about how they use new technology collectively shapes market standards and that ‘regulation needs to reflect those standards’ is very debatable. Surely, standards need to be set and regulation needs to ensure that those standards are maintained and are not undermined by technology.
4.2 – From the consumer perspective, wider scope to make use of IT, although enticing, can present unexpected risks. The Financial Times published an article in its Money supplement on 8th April 2023 about how fintechs had been hit by a surge of customer complaints.1 As the FT commented:
‘The growth of online payment firms and digital-only banks has brought customers increased choice, speedy technology and lower costs. But their advance has been accompanied by growing complaints in the UK and the EU, as users are hit by everyday mishaps and by financial fraudsters’.
4.3 – The key reasons are the ‘speed to market’ of IT solutions and the standard assumption that these solutions will work. The complexity of the IT inter-dependencies are huge. Consumers cannot be expected to understand these.
4.4 – This discussion paper may be considering asset and portfolio managers rather than online banks and payment services; but many of the service standards that need to be maintained are very similar in each case. Investors must be able to invest and trade assets with confidence and must be certain that they can do so without unnecessary delays or interruptions to the service.
4.5 – The FCA has warned e-money firms that they will need to show a significant change in culture and behaviour once new protections come into force in July (2023) under the consumer duty regime. If a new regime is to be introduced for the asset management industry, it should attempt to foresee and head-off problems that could be caused by the introduction of new technology and resultant harm to consumers.
4.6 – The introduction of tokenised portfolio assets may well create new opportunities for the asset management industry. However, much of the thinking around this at present seems vague and ill-defined. Too often it is the provider who benefits most from the introduction of new technology rather than the user. In the case of investment platforms, for example, new technology seems to have been used to frustrate competition. Providers have used different pricing models to give the appearance of competing when, in fact, pricing has been used simply to confuse the market and make value-for-money comparisons very difficult. At the same time, functional differences between the services provided by platforms have been negligible with little or no attempt made to compete on this basis. Providers have tended to offer more or less the same package – although it looks now as though this may slowly be changing.
4.7 – Another area in which sophisticated regulatory control is going to be required, and on a pre-emptive basis, is that of the application of artificial intelligence (AI). There are clear indications already that serious risk of harm to consumers could easily emerge in this area and that financial services could be a near-perfect seeding ground. We discuss this further in our response to Questions 2 and 14 below.
4.8 – There should also be relatively easy opportunities to use technology to enhance the service-offering to consumers. For example, introducing more flexible charging options that offer better value for money for consumers. We find it difficult to see how ad valorem charges can be justified in many cases. Similarly, if an annual performance fee is to be charged, it should be possible, using technology, to rebase the performance fee each year so that the performance fee is only levied on the incremental increase in the value of the portfolio at the end of each year.
5 – Consumer Education/numeracy.
Alongside all this, there remains the need for better financial education and awareness among consumers. The best approach to protecting consumers is to ensure that they are equipped as far as possible to protect themselves. It is within this context that better regulation should be set.
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