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SECOND DISCUSSION DOCUMENT ON INVESTMENT RELATED MATTERS

Background

Background

and Purpose

Background

  • Initial RDR published in 2014

  • Discussion Document on Investments and Related Matters – 2018

  • Second Discussion Document on Investment and Related Matters – 2019

  • Purpose of Second Discussion Document is to provide feedback and updated thinking on 2018 document

Updated thinking

Updated thinking based on input received on the 2018 Investments Document

Section 1

Section 1

The general investment landscape

The general investment landscape

• Regulatory intervention is needed

Section 2

Section 2

Defining and understanding different activities performed under a discretionary investment mandate

“Mandates for convenience”

Defining “investment management”

Categorizing activities

Fit and proper standards

Defining "Investment Management"

  • FSCA’s view is that a definition of “investment management” is required

  • The FSCA invites suggestions regarding a possible definition.

  • The definition should cover the following:

Definition

  • Obtaining a mandate from a financial customer to apply an agreed level of decision making, on behalf of the financial customer;
  • after establishing and agreeing the financial customer’s investment objectives and investment risk appetite;
  • identifying, selecting, acquiring or disposing of financial products, financial instruments or other assets (or identifying and selecting other investment managers to perform this activity);
  • in accordance with an investment strategy and investment objectives set out in the mandate;
  • in accordance with any parameters, limits, thresholds or other instructions set out in the mandate;
  • handing any assets acquired over to a custodian or nominee for safekeeping.

Potential regulatory arbitrage between advice and discretionary investment management

  • Concerns regarding CAT I investment advisers who copies CAT II investment managers by recommending investments, without meeting CAT II requirements

  • FSCA is not concerned and do not think its needed to pose limits

  • Natural ceiling exists as adviser would need consent for every transaction

Copy trading technology

  • Technology driven models which replicates the trading decisions of other investors

  • FSCA will investigate further

Section 2

Defining and understanding different activities performed under a discretionary investment mandate

Categorizing activities

“Mandates for convenience”

Defining “investment management”

Fit and proper standards

  • All sub-categories will be defined and FSCA invites suggestions for definition

  • Entity will need to apply for License for discretionary investment management and authorization to perform sub-activity

Categorizing investment management activities

  • FSCA remains of view that “one size fits all” scope of CAT II license is too broad

  • Sub-categorization is needed

  • FSCA proposes 3 sub-activities for licensing:

Asset management

Multi-management

Alternative investment management

Discretionary investment management comprising manager selection (including management style and asset class selection)

Discretionary investment management comprising asset selection (including asset class selection)

To include hedge fund management, private equity management, and potentially other alternative investment strategies. This category would in effect be an appropriately expanded version of the current FAIS Category IIA license category.

Section 2

Defining and understanding different activities performed under a discretionary investment mandate

“Mandates for convenience”

Defining “investment management”

Categorizing activities

Fit and proper standards

Fit and proper standards for investment management

  • FSCA believes that fit and proper requirements must be aligned with sub-activities
  • Asset management
  • Multi-management
  • Alternative investment management

  • FSCA requires industry input regarding fit and proper requirements for each sub-activity

  • Will be a degree of overlapping

  • “Core” requirements

Section 2

Defining and understanding different activities performed under a discretionary investment mandate

“Mandates for convenience”

Defining “investment management”

Categorizing activities

Fit and proper standards

“Mandates for convenience”

  • Refers to CAT II FSP who perform very little actual portfolio construction, design or selection

  • Mainly to avoid need to obtain written instructions to re-balance portfolio

  • FSCA proposes to define activities for “mandate of convenience”

  • The following criteria must be met:

  • These intermediaries will perform services under “standing authorization” and are not regarded as exercising an investment discretion

  • May not describe itself as investment manager

  • Only mandates by “retail customers” = natural persons until COFI expands definition

  • Portfolio re-balancing by “non-retail customers” will still need full discretionary investment license

Naming of mandate

FSCA invites suggestions on possible naming:

  • “Standing portfolio adjustment authorization”

  • “Limited investment administration mandate”

  • “Defined investment execution mandate”

  • Combinations of the above.

Scope of mandate

  • FSCA agrees that a clear definition of activities is essential

  • 2018 investment document:
  • Transactions would be limited to those to rebalance the client’s portfolio
  • At pre-agreed periods of time
  • Back to fund / asset allocations
  • That the client originally agreed to

  • FSCA requires input on this

  • FSCA considered to expand mandate to include CIS switching between CIS portfolios operated between different asset managers, but not in favor of this – this will entail discretion of adviser when selecting an investment manager.

Fit and proper requirements

  • No additional requirements

  • CAT I FSP

  • Mandate holders will be subject to governance requirements

Licensing and authorization

  • Normal CAT I FSP license

  • Required to inform FSCA of intention to perform “mandate for convenience” activities

  • No need to notify if entity has CAT II or IIA license

Section 3

SECTION 3

CATEGORIZING INVESTMENT ADVISERS WITHIN AN RDR FRAMEWORK

CATEGORIZING INVESTMENT ADVISERS

• Goes hand in hand with RDR – Categorization of Advisers Paper

• 2 types of advisers

  • PSA
  • RFA

• Same entity may not operate as both PSA and RFA

Is there a need for “tied” advice (PSA) model in investment industry?

  • FSCA believes that such a need exists

  • But PSA refers to agent of product supplier

  • CIS management companies are product suppliers

  • But discretionary investment managers and LISP platform are specialized intermediary services and not product suppliers

  • Either PSA model must be amended to include “product supplier” and “services provider”

  • Or Investment managers and LISP platforms must be regarded as “product suppliers”

PSA model in investment industry

PSA’s of LISPs

PSA of CIS management companies

PSA of investment manager

PSA’s of LISPs

PSAs of CIS management companies

Allowing investment managers to appoint “tied” advisers

  • LISP role is purely administrative

  • No need to appoint PSA to recommend its administrative services

  • FSCA invites comments to this approach

  • If LISP is allowed to appoint PSA, will need advice license (CAT I) in addition to administrative license.

  • Already product suppliers – no structural changes required

  • Change in the following:
  • FAIS exemption of CIS companies – adviser will be subject to FAIS obligations
  • CIS legislation – to remove advice from scope of company’s ordinary administrative activities

  • FSCA believes that this should be allowed

  • Expand the scope of “PSA model” to make provision for “product supplier” and “services provider”

  • This proposes change to current RDR proposal of PSA

  • PSA will therefore be allowed to offer the entering into a discretionary investment mandate with discretionary manager within group

  • Discretionary investment manager will then be responsible for advice provided by adviser

Defining “group” products and services

PSA may recommend / offer the following

  • Product supplier: PSA may recommend products by product suppliers in its home group

  • Discretionary investment manager: May also offer the entering into a discretionary investment mandate with discretionary manager within group

  • CIS management company: May recommend CIS portfolio offered by CIS management company within group, even if underlying investment manager is not within group

  • Investments into 3rd party co-branded CIS portfolio managed by investment manager within group – even if CIS management company is not within group

  • PSA’s that have a LISP platform within the group must use that platform for non- “wrapper” offerings. Other than this limitation, the choice of LISP platform will not be restricted.

Third party co-branded CIS models

  • Relationship between CIS management companies and discretionary investment managers

  • Question was regarding responsibility of CIS management company
  • Investment decisions by investment manager
  • Advice provided
  • LISP services provided

Investment Manager

Advice

LISP Services

Independence of advice in 3rd party co-branded arrangement

Responsibility for use of LISP’s in 3rd party co-branded models

Investment Manager

  • Same level as with non- co-branded CIS portfolios

  • FSCA requires oversight at portfolio level, not adviser level

  • Question: May 3rd party investment managers (also licensed for advice) describe themselves as independent?

  • Same pending changes to General Code of Conduct

  • Read together with RDR paper on adviser categorization
  • FSCA remains of view that CIS management company retains full accountability

  • If entity is not comfortable with the level of oversight, they should apply for own license to operate as CIS management company

Due diligence responsibilities

  • Questions regarding extend of due diligence required

  • Should be principle based and flexible

  • Aligned with other regulatory frameworks

  • Reliance of FSCA license

  • Alternative term – due diligence is too extensive

  • Should be able to outsource function

  • FSCA will consult in more detail

Section 4

Section 4

Implications for remuneration and charging structures

Cost disclosure

Mitigating the risk of duplication of charges

Mitigating the risk of conflicted advice in vertically integrated models

Facilitating and monitoring advice and other fees

Remuneration for automated advice

Remuneration for non-advice distribution

Cost disclosure

Feedback received:

  • Supported ASISA’s Effective Annual Cost (EAC) disclosure mechanism

  • EAC would require technical adjustments to provide for wider range of products

  • Concerns raised regarding complexity of mechanism – difficult for customers to understand

  • Disclosure document similar to Minimum Disclosure Document required for CIS portfolios – for non-CIS products

  • FSCA will engage with ASISA

Mitigating the risk of duplication of charges

Additional risk measurements include the following:

  • The implementation of “clean pricing” for LISP platforms – as introduced by proposal YY;

  • Implementation of FSCA’s proposal to extend the ASISA EAC cost disclosure mechanism;

  • Prescription of the types of fees that may be charged;

  • Impose and investor “opt-in” every three years;

  • No fee should be charged without an actual demonstrable service provided;

  • Requirement to provide a detailed fee comparison when investments are switched;

  • Suggestion to separate advice fees form product or service fees;

  • FSCA will further explore suggestions

Mitigating the risk of conflicted advice in vertically integrated models

Proposal: Ensuring the relevant relationships are clear through common branding, advertising and marketing.

Stakeholder feedback:

  • Majority supported this proposal
  • Practical challenges where there are groups with multiple brands

FSCA’s updated position

  • Remains of view that branding is useful tool to highlight intra-group relationships
  • Open to use of co-branding provided that display is prominent

Mitigating the risk of conflicted advice in vertically integrated models

Proposal: Requiring advice and investment management in groups to be provided through separate legal entities.

Stakeholder feedback:

  • Views were divided

FSCA’s updated position

  • Refers to RDR document on adviser categorization
  • Group of companies may operate as both PSA and RFA – separate legal entities
  • Investment manager may appoint a PSA – must have advice license
  • PSA may recommend investment management services of investment manager within the group
  • Investment managers may also hold advice license as RFA – advice must be objective and not biased towards own products
  • FSCA will not proceed with proposal that same entity may not charge for both advice and investment management fees – inconsistent with activity-based approach of RDR

Facilitating and monitoring advice and other fees

  • Views on proposal to facilitate, monitor and report on advice fees were divided

  • Suggested that it should be practical to implement

  • FSCA will consider divergent views and share updated thinking

Remuneration for automated advice

  • Almost all commentators agreed that no special standards should exist

  • Some points raised:
  • Remuneration models should be flexible to account for technological developments
  • Remuneration should commensurate with services provided
  • Automated models are not more cost effective
  • Same level of conflict of interest

  • FSCA’s updated position
  • Agrees that no separate remuneration model is required

Remuneration for non-advice distribution

Stakeholder feedback

  • Different types of non-advice should be considered in remuneration model
  • Scripted sales
  • Non-advice services
  • On-line sales
  • Agreed that fee should be fair and reasonable for services rendered
  • No advice fee could be charged
  • Full disclosure of fee

FSCA’s updated thinking

  • Will consider whether explicit remunerations standards are required

Mitigating the risk of conflicted exercise of discretionary mandates

  • Models where investment manager places investments in portfolios managed by himself / his associates

  • Poses a conflict of interest

  • Fees are charged by portfolio manager and investment manager in same group

  • Industry agreed that clear disclosure of different fees and services

  • FSCA will consider all comments

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