The appointment of a new head of the UK Financial Conduct Authority from the Bank of England will increase concerns about the regulator’s review of the UK asset management industry.
The UK government said in a statement today that Andrew Bailey will become the chief executive of the FCA. He succeeds Tracey McDermott who has acted as interim chief executive since Martin Wheatley stepped down in September last year.
Bailey has worked at the Bank of England for more than 30 years. Since April 2013 he has been deputy governor for prudential regulation at the Bank of England and chief executive of the Prudential Regulation Authority which is responsible for the supervision of banks, investment banks and insurance companies.
Sean Tuffy, head of regulatory intelligence at Brown Brothers Harriman, the US bank, said in a tweet: “The UK asset management industry was already nervous about the FCA review, having a prudential regulator at the helm will heighten the concerns.”
Last November the FCA published the terms of reference for a study of the UK asset management market to determine whether there is enough effective competition for investors to get value for money. The regulator will review how asset managers compete to deliver value; whether asset managers are willing and able to control costs and quality along the value chain; how investment consultants affect competition for institutional asset management and whether there are any barriers to innovation or technological advances which may be preventing new ways of doing business that could benefit investors.
The FCA is slated to publish an interim report in summer of this year, highlighting areas of concern, and a final report is due early next year. The regulator said: “If we conclude that competition is not working well, we may intervene to promote effective competition. We can do this through rule-making, introducing firm specific remedies or enforcement action, publishing general guidance or proposing enhanced industry self-regulation.”
Andrew Bailey, FCA
Sheila Nicoll, head of public policy at Schroders, the UK fund manager, told Brown Brothers Harriman in an interview at the end of last year that all eyes will be on the FCA’s competition review in the UK. Peter Grimmett, head of fund regulatory development at rival M&G, said in the same interview that the FCA’s review will divert resources in the UK to providing significant amounts of data.
Bailey gave a speech on identifying and responding to risks in financial markets at Cambridge University last May. He said that shocks that might prompt large-scale asset disposals are of particular concern as the global asset management industry has grown to be large in size in its own right and relative to the commercial banking system.
“A key issue is the degree to which asset managers (or shadow banks) typically offer short-term redemptions against potentially illiquid assets,” Bailey added. “This capacity to realise assets without unwanted disturbance to financial markets is therefore critical and is shaping the work of authorities. The risk is inherently global in nature, thereby suggesting that internationally coordinated policy action is the preferred outcome where necessary. “
He also expressed concern about the rapid growth in size of global bond markets while bank balance sheets and market-making has shrunk. “This reduction in market-making capacity has been associated with increased concentration in many bond markets, as firms have become more discriminating about the markets they make, or the clients they serve,” said Bailey. “But this trend has gone hand-in-hand with a growth in assets under management, with important implications for the provision of liquidity by market-makers in times of stress in those markets.”
Another development that could have an impact is the growth of automated trading. Bailey agreed with the conclusion of the Federal Reserve Bank of New York that understanding how the evolving market structure is affecting market liquidity, efficiency and pricing is highly important.
The PRA, the UK’s prudential supervisor of major trading firms, has been collecting data to build a greater understanding of the channels through which market liquidity can affect financial stability and economic activity.
“We are establishing a better understanding of how asset managers form their strategies for managing liquidity in their funds in normal and stressed conditions (taking into account any increase that might have occurred in the correlations between various market participants’ trading activities, such as the use of passive investment strategies); and deepening our knowledge of the contributors to greater fragility of market liquidity,” Bailey said. .
He continued that another area of concern was the risk of asset managers offering short-term redemptions to investors against potentially illiquid securities as the proportion of assets held in such structures has increased.
“Work continues on putting into practice appropriate policies and standards to prevent the risk of disorderly sales of assets in the face of investor withdrawals,” Bailey added. “Potential responses (and at this stage we are looking at options in an open way) are to require funds to hold larger liquid asset buffers to facilitate orderly redemption payments to investors, to apply more stringent leverage limits where appropriate, and to require that the redemption terms offered to investors take sufficient account of the risk that secondary market liquidity in the assets they hold could become impaired.”
Bailey will take up his new role at the FCA once his successor at the Prudential Regulation Authority has been found.
The Association for Financial Markets in Europe said it welcomed Bailey’s appointment. The AFME tweeted: “Andrew Bailey’s experience at PRA will be invaluable for continuing @TheFCA’s work rebuilding trust in the UK financial markets.”
John Griffiths-Jones, chairman of the FCA, said in a statement: “He brings unrivalled regulatory experience, a proven track record and an excellent reputation in the UK and internationally. Having been an FCA board member since 2013 he has been fully engaged with all the regulatory issues that we have faced in recent years and in setting our strategy for the future.”
