FCA view: How coronavirus is impacting the quest for operational resilience

Nick Miller, Head of Asset Management at the Financial Conduct Authority, gives an update on what the watchdog expects from firms when it comes to operation resilience and how the sector is coping with the coronavirus crisis

Sara Benwell POSTED ON 6/8/2020 1:32:19 PM

Nick Miller, Head of Asset Management, FCA

“We are still living through this period of extraordinary economic turbulence,” said Nick Miller, Head of Asset Management at the Financial Conduct Authority (FCA).

He was giving an update to an audience of operational managers at investment firms, looking at how coronavirus is impacting the sector, and what the regulator is doing to ease the path to resilience for managers.

One of the biggest impacts, he said, was increased levels of volatility resulting in extraordinarily heavy trading flows. However, despite this, he believes the sector is holding up well.

"Generally speaking, continuity for clients has been there throughout."

He said: “Redemptions have been broadly manageable for the sector and we’ve seen very few outages and none that seem to have, at least so far, caused us concern that they may be of significant harm to clients. Generally speaking, continuity for clients has been there throughout.”

Indeed, the regulator has taken substantial steps to help firms achieve this continuity. Miller pointed to relaxed deadlines on consultations and proactive pieces of supervisory work that have been put down as examples of where the watchdog has stepped in (or back) to help businesses weather the pandemic storm.

He said: “We’ve made a number of announcements not only around the importance of maintaining open and orderly global financial markets but also allowing some flexibility and some forbearance recognising that firms have needed to be focused on the immediate crisis management piece.”

He added that there have been a number of interventions in relation to asset management where the FCA has put down a marker to give extra time for delivering fund accounts.

"How are you ensuring that your teams are contributing to upholding market integrity and trading?"

He said that asset management firms had risen well to one of the biggest challenges faced by businesses up and down the country – namely the move to home working - but cautioned that there are some risks which need to be addressed.

He said: “This is an extraordinary change and achievement but raises a whole number of questions, in particular around monitoring and surveillance. So, how are you ensuring that your teams are maintaining good markets and contributing to upholding  market integrity and trading? Whilst we do recognise that this is a challenge, equally, it is not good enough to say that you just can’t do it.”

Valuation is another challenge for asset managers, particularly given the high levels of investment volatility and Miller asserted that there are some areas where firms could do better.

Next, he turned to liquidity management – something that he said has been top of the mind at the FCA for some years now and which is even more sharply in focus due to the effects of Covid-19.

"We do expect firms to proactively reach out to us where they think funds might be coming into difficulty"

He explained: “There is a question here around how effective, consistent and fair the application of liquidity management tools has been for investors throughout this period.

“Of course, this period gives us a lot of interesting data because the use of these tools intuitively will have been more significant than ‘normal times’ so this is a particular area that we have been monitoring.

“We do expect firms to proactively reach out to us where they think funds might be coming into difficulty but generally speaking redemptions have proved manageable so far.”

Cyber security is another issue that has been high on the FCA’s agenda and which has been exacerbated as firms deal with the pandemic.

"We want to ensure that firms are doing their best to maintain their cyber defences at this time"

The vulnerabilities have increased and cyber-attacks can be quite significant. There has been a worrying uptake in scams there is an increase in usage of phishing emails by rogue actors who are claiming to act on behalf of legitimate firms.

Miller said: “Here we want to ensure that firms are doing their best to maintain their cyber defences at this time and that they are doing everything they can to protect the integrity, not only of client assets, but client data, which, is a particular risk for the asset management community.”

Finally, he pointed to communications as significant challenge for firms during the pandemic. He said: “Another important factor is how you are dealing with your clients, are you communicating with them effectively, do they understand what is going on with their products and investments and are you considering whether all of your fund range will remain viable in the future.”

Miller argued that most of these issues are governance ones, and good governance remains absolutely critical to the regulator.

"Are you considering whether all of your fund range will remain viable in the future.”"

He said that while decision-making may be clunkier, more difficult and less efficient, asset managers must still maintain governance processes and the best interests of customers - regardless of market conditions. 

He concluded that it is important that firms are documenting and thinking carefully about these decisions and recording them appropriately.

 

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