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FSCA takes further steps

03 September 2018 Jonathan Faurie

When the Financial Sector Conduct Authority (FSCA) announced that it would be implementing regulatory reforms arising from the findings of the Retail Distribution Review (RDR), there was a lot of concern expressed by insurers and advisers alike. Key aspects of RDR that need to be taken into consideration is that its aims include the delivery of suitable products and fair access to suitable advice for financial customers; and enabling customers to understand and compare the nature, value and cost of advice and other services intermediaries provide.

The FSCA recently released a discussion document on how RDR could be applied in the investment industry. Part of this document tries to define and understand the different activities performed under a discretionary investment mandate. 

The first step

In an effort to gain this understanding, the FSCA has identified four key types of discretionary investment activities in the industry. 

The first activity is the so-called traditional investment management, typically entailing portfolio construction through analysing and selecting the underlying instruments (shares, derivatives, bonds, cash and property – whether local or foreign) making up one or more portfolios. 

The FSCA document pointed out that this group would typically provide one or both of the following investment management services:

  • discretionary investment management for collective investment scheme (CIS) management companies on an outsourced basis on behalf of the management company, usually without interacting directly with particular CIS investors. The CIS management company appoints the investment manager to manage the assets in one or more of its CIS portfolios in accordance with the founding mandate (investment policy) of the portfolio concerned; and
  • discretionary investment management of a portfolio of assets held for a specific investor (usually a pension fund, corporate or high net worth individual) on a segregated basis in accordance with a discretionary mandate agreed with the investor concerned. 

Third party co-branded management

The second activity relates to third party co-branded investment management (sometimes referred to as white label arrangements). 

The FSCA document observes that this activity is similar to the discretionary investment management carried out by traditional investment managers acting on behalf of CIS management companies and also would entail the investment manager acting on behalf of the CIS management company in relation to managing one or more of the management company’s portfolios.

The FSCA document adds that in this model, however, the portfolios are co-branded with the brand of both the CIS manager and the third-party investment manager and are marketed and distributed by the third party investment manager (usually through its own Category I financial advisers, advisers in its group or third party distribution channels) to investors. In some cases, the third-party investment manager itself is also a Category I financial adviser. 

The FSCA points out that these arrangements are often entered into with CIS management companies that wholly or partially specialise in third party co-branded structures. In many such models, the third-party investment manager owns the distribution channel concerned, although the CIS management companies have varying degrees of involvement in supporting the distribution channel. 

Models also exist where the third-party investment manager (with its related distribution channel) has a direct ownership interest in the CIS management company. 

Model portfolio management

The third activity that the FSCA has identified is model portfolio management. 

The FSCA points out that this entails selecting and designing customised or model portfolio solutions for groups of customers or individual customers, in most cases comprising a selection of participatory interests in existing CIS portfolios. 

The FSCA adds that the model portfolio may also include non-CIS investments, such as individual securities or other instruments. Where the model portfolio solution comprises CIS portfolios offered by a number of different providers, the model portfolio provider is usually referred to as a multi-manager. 

Similar to third party co-branding investment managers, these providers also typically market and distribute their model portfolios to investors through their own Category I licence; through Category I financial advisers in their group; or through unrelated distribution channels. 

Mandates of convenience

The last activity category that the FSCA identifies is mandates that are held mainly for convenience. 

The FSCA proposed that these entities do not perform, or perform very little, actual portfolio construction, design or selection. 

However, they obtain a discretionary mandate from customers primarily for the sake of convenience, to obviate the need to obtain new written instructions from the customers whenever portfolio switches between existing structures are made. This is typically done for the purposes of rebalancing the composition of the portfolio to align with the customer’s previously selected asset allocation. 

Editor’s Thoughts:
It is important to note that these are merely proposals set out by the FSCA and are not cast in stone. Engagement with the FSCA can only benefit the industry.  Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts

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