In its Discussion Paper (DP): DP23/2: Updating and improving the UK regime for asset management, the FCA suggests Brexit has provided an opportunity to bring the regulation of the fund management industry and the wealth management industry into greater alignment, specifically where retail portfolios are “based on a standard service”. PIMFA members are deeply concerned that such an alignment would result in rules that have been specifically designed for the management of funds, being inappropriately extended to the managed portfolio services (MPS) they offer to retail clients.

PIMFA believes that aligning regulation in this way would effectively ignore the significant differences between fund managers, who create and manage pre-packaged investment products, and discretionary investment managers, who provide a service where the client is the owner of the underlying assets held within the portfolio. PIMFA sees no benefit in applying product regulation to MPS and has warned the FCA that the cost implications of restructuring regulation in this way could result in MPS (which tend to have lower average charges than unitised funds) being economically unviable for firms to offer.

PIMFA strongly disagrees with the suggestion in the DP that retail portfolio managers are currently regulated to a lower standard than fund managers. While the paper identifies a number of areas where Handbook requirements applied to fund managers are not replicated for portfolio managers, it neither analyses how appropriate those requirements might be for segregated retail portfolios, nor considers the wide range of alternative regulatory safeguards that apply to portfolio management.

The extension of fund rules to managed portfolio services would, in almost all cases, be entirely inappropriate. MPS are offered subject to suitability, there are FCA restrictions around high-risk investments and portfolio managers must demonstrate they are acting in their clients’ best interests, a principle that is being significantly reinforced by the new Consumer Duty. Moreover, MPS are extremely popular with clients (and advisers), offering distinct advantages in comparison with investment in a fund-of-funds or multi-asset fund. MPS allow retail consumers to maintain direct ownership of the assets in their portfolio; they provide greater transparency in relation to those assets; they can be flexed for relatively small cohorts of clients; their assets are more readily transferable; their fees are generally lower than equivalent products; they are as liquid as their underlying assets; and, last but certainly not least, they benefit from the broad range of investment skills and disciplines that wealth managers apply across their business, including their management of bespoke portfolios.

DP23/2 places considerable emphasis on creating greater alignment across the UCITS, AIFMD and MiFID regimes inherited from Europe and in reducing areas of Handbook duplication/overlap. PIMFA believes that, while creating a common framework for the regulation of all investment managers might result in a neater, less repetitive Handbook, this is not a sufficient benefit to justify major changes to the MiFID II provisions that firms implemented at enormous cost only five years ago.

In setting out how the UK should move from its current reliance on retained EU law to a comprehensive UK-centric model of financial services regulation, the government made clear it expected regulators to initially replace repealed provisions with rules similar to those currently in place but to ensure that those rules were properly tailored for the UK markets.

PIMFA urges the government and regulators to bear in mind not only the potential costs of future changes to regulation but also the costs that firms have incurred in implementing major items of EU legislation in the relatively recent past. The focus of post-Brexit regulatory change should be on areas where EU-derived rules have clearly failed to meet their objectives or have imposed disproportionate burdens upon firms.

Liz Field, chief executive of PIMFA, commented: “There are very serious concerns within the wealth management community about these proposals.

“New rules that seek to align the way that fund managers and discretionary investment managers are regulated would load unnecessary and disproportionate burdens onto the latter. Moreover, discretionary investment managers would be forced to comply with requirements that have little bearing on what they do and show little understanding of the services they provide. It is also questionable whether such sweeping changes should be contemplated before regulators and industry have a chance to assess the impact that the new Consumer Duty has in improving outcomes for retail consumers.

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“The distinct differences and the undeniable need for appropriate and proportionate approaches for the benefit of firms and their clients has been widely accepted and catered for in the past. We hope to see this continue in the future and would much rather that policymakers used a scalpel and not a sledgehammer when it comes to reforming EU regulations.”