What is the UK regulatory framework?

Ali Curi: Markets Conversation is an ION podcast where we discuss topics of importance to capital market participants with product owners, subject matter experts, and industry leaders.

Adrian Turton: Regulation of ESG can only be a good thing at the moment. The industry is not really sure whether ratings are real, especially as they tend to be different according from which data source you get them.

Standardization of it will only make life easier for the asset management community. Cryptoassets, on the other hand, are actually a bone of contention in the industry. They will be regulated and firms will need to actually adjust how they interact accordingly. From an AI perspective until we have more use cases, the impact will be minimal, especially in the asset management area.

Although saying that, I think that changes are coming sooner rather than later as actually the AI bandwagon very, very rapidly getting larger and larger, and if you’re not part of it, you will get left behind.

Ali Curi: Hi everyone. And welcome to Markets Conversation. I’m Ali Curi. In today’s episode, Adrian Turton from ION’s Asset Management Division will discuss how the regulatory landscape is undergoing a significant transformation with the implementation of the Financial Services and Markets Act of 2023, or FSMA 2023.

Adrian will delve into the key provisions of FSMA 2023, particularly those impacting areas like ESG, data management, and digital assets. We’ll discuss these critical developments and their implications for asset management professionals in the UK.

Let’s get started. Adrian Turton, welcome to the podcast.

Adrian Turton: Thanks, Ali. It’s good to be here.

Ali Curi: Adrian, let’s talk about regulation.
Adrian, you wrote a blog post that explores the new UK regulation framework. Let’s start with an overview of the Financial Services and Market Act or FSMA 2023, what is it? What has it changed and how do these changes affect asset management professionals?

Adrian Turton: The landmark decision by the UK to leave the European union or Brexit, as it was known, actually went into effect on the 31st of January, 2020, obviously that sent repercussions all the way through the economy. And one of the biggest impacts from a UK perspective was in the financial sector, particularly because of the fact that the EU and the UK law is very intertwined as it’s sort of built up over the years of regulation.

The government, as part of the move to Brexit, had to perform what was called onshoring of the EU law into UK law as an interim solution. At the same time, it was discussing and asking for recommendations from the regulatory bodies and industry experts to recommend some sort of framework of ideas and recommendations that could be implemented as the basis for the new laws for the regulation to be built off of.

The culmination of this was various measures across both domestic regulations and the review of the retained EU law as set out in the Edinburgh Reforms in December of 2022, and then expanded upon by the Chancellor in his Mansion House announcement in July of 2023. By the 29th of 2023 FSMA 2023 was passed into law and the act gives the government power to both repeal onshored EU law and also set the framework to enable the financial services regulatory bodies to establish a set of rules and regulations that the industry could then follow. Revised rules will obviously affect all parts of the industry because firms will have to revise, review all of their policies in order to meet these new regulatory requirements.

Ali Curi: New regulation is often seen as regressive and prohibitive. Are there any upsides to the new framework? Any additions or inclusions that are actually welcomed?

Adrian Turton: Yes, absolutely. I think one of the most interesting parts is the new technologies, the new funds that have been included as part of the new framework. I’m including things like the ESG or in environmental, social and governance funds, AI and machine learning type areas, and also all of the digital assets, specifically the cryptocurrencies, which is a market that’s exploded over the last few years.

Current legislation in these areas are really quite sparse and non existent, so it’s quite significant that these areas are being addressed as part of the new framework. I know that for the ESG side of things, the Chancellor of the Exchequer announced recently in his spring budget that the government will actually regulate the provision of ESG ratings where they’re used for investment decisions and where they influence capital allocation.

The expectation is that this will improve both clarity and trust in the ESG ratings. With regards to crypto assets, the UK has already made it clear that it expects to bring them under the same regime as the rest of the securities that it regulates under the financial services framework that we’re discussing in this podcast, the FSMA 2023.

They’ve also introduced a sandbox environment, which is basically a place where firms can go with ideas for new instruments, new cryptocurrency types. And they can play about with them in a temporary development type environment that has all the regulatory aspects within it, but none of the risk, because obviously it’s not actually exposed to the markets. On the AI side, the government has actually stated that it’s very much opposed to a risk based approach to legislating and much prefers a non statutory approach, which is based on the context of the AI rather than the risk side of the AI.

Ali Curi: How do you see any of these new areas of regulation impacting the way asset managers operate?

Adrian Turton: There have been mixed reactions to these areas from industry as a whole, particularly with regard to the cryptocurrencies. I think regulation of ESG can only be a good thing at the moment. The industry is not really sure whether ratings are real, especially as they tend to be different according from which data source you get them.

Standardization of it will only make life easier for the asset management community. Crypto assets on the other hand are actually a bone of contention in the industry because many believe that the industry itself should regulate it rather than the government and they cite the stifling of innovation through a standard types of regulation.

Reality is, really, for cryptocurrencies that they will be regulated and firms will need to actually adjust how they interact accordingly from an AI perspective until we have more use cases, the impact will be minimal. Especially in the asset management area, although saying that, I think that changes are coming sooner rather than later as actually the AI bandwagon very, very rapidly getting larger and larger. And if you’re not part of it, you will get left behind.

Ali Curi: Adrian, FSMA 2023 or “FISMA” as it’s known, brings new rules, but asset managers are also under pressure to cut costs and work smarter. What strategies can be employed to effectively navigate this new environment?

Adrian Turton: Yeah, I think asset managers need to be on top of the ongoing discussions and changes that are happening. I think there’s several ways they can do this. The FCA obviously produce white papers consistently and they’re to do with the proposed new regulation or changes to regulation. They want to have feedback on those white papers and understand how the industry thinks that it will affect them so that they can steer them in a direction that actually works for everybody.

They can also ensure that the people that they have in positions to recommend how to interact or react to these new regulations are experts in the area, understanding the new legislation and how it affects business and the developing strategies. They can ensure they have experts in these areas and these people should be able to analyze the information provided and provide guidance on how this will impact their business.

Understanding how this new legislation affects the business and developing strategies to mitigate for any risks inherent in that is key to ensuring that everything continues to run smoothly.

Ali Curi: So Adrian, tell us about the FCA’s focus on UCITS funds, and how it’s looking to streamline regulations for these funds. Meaning what are the potential benefits of this for the industry?

Adrian Turton: Okay, the Financial Conduct Authority or FCA is the regulatory body who that’s responsible for creating rules and regulations for the industry. UCITS or Undertakings for Collective Investment in Transferable Securities, which is a bit of a mouthful, which is why everybody calls it UCITS.

It’s a regulatory framework that allows for the sale of cross boundary mutual funds for EU member states. The FCA are really investigating why some funds are regulated like alternative investment funds, where in principle only retail rules should apply. There’s a distinction between the requirements applied to managers of authorized retail funds and managers of alternative investment funds.

There has been discussion on whether non usage funds might be rebranded to help rationalize the regime. And if so, how best to do this. Simplifying the rules for non usage funds is, and continues to be a focus for the FCA.

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Ali Curi: Adrian, so FSMA 2023 aims to establish a globally competitive environment for UK financial services. But how will this impact the relationship between the UK and EU regulations moving forward?

Adrian Turton: I think that it’s probably even more important for continued collaboration between both the UK And the EU regulators as the UK continues its regulatory journey, because these new laws and regulation improve the competitiveness of UK based firms and can only really be effective if they’re complemented by the legislation from the EU.

Regulatory divergence between the two regimes will obviously inevitably cause issues for firms and both markets will need to be careful that they’re competitive without the actual regulation being a reason for companies to move their business elsewhere.

Ali Curi: With innovation rapidly changing the financial landscape, how can technology be leveraged to ensure compliance with all these evolving regulations?

Adrian Turton: I think technology’s obviously key to the asset management industry’s adoption of new regulation. I’m obviously biased as I’ve worked for a technology company myself. Innovation’s always been a factor in the industry’s growth, but new UK regulation, the rapid pace of the growth of artificial intelligence, the speed of uptake of ESG funds, and the explosion of the cryptocurrency markets make it impossible to keep up with a large amount of change that’s already hitting market participants without technology taking on a huge part of the burden. Ensuring the data to meet new regulatory requirements is available, adding data points so that automated compliance rule check ins in place, ensuring trades are timely so that the new trade settlement regulation is adhered to, are all ways in which technology is essential to ensure asset managers meet their regulatory obligations.

Ali Curi: So looking ahead, what are the regulatory developments should asset management professionals be keeping an eye on?

Adrian Turton: I think the fact that there’s no real global approach or agreed global approach to either the crypto assets or AI regulation should be a concern and asset managers should keep a close eye on this as it develops over the coming months and years. Another area that could cause issues as it moves forward is the move towards shorter settlement times in some countries.

I think it will continue to be a trend in the industry and obviously lead to a greater burden to market participants, especially with regards to transaction reporting and ensuring that trades match and settle more quickly, so data will be key. On the FX side of the equation it seems to me that may cause issues in the short term until maybe a similar change occurs in those markets, borrowing and lending will come under more pressure due to the shortened turnaround times.

Ali Curi: With all the changes happening in the industry, how do you see FSMA 2023 playing out for UK asset managers in the long run?

Adrian Turton: I think FSMA 2023 is just the beginning of the story for UK regulation. It’s obviously put together a framework for regulators to effectively regulate the market, while at the same time allowing the government to improve how competitive the UK is in attracting asset managers to make the UK their base of operations.

There is actually a secondary objective that the government’s imposed on its regulators, which is to act in a manner which facilitates the international competitiveness of the UK economy and its growth. This can only be a good thing as the FCA look to regulate for both innovation and growth, but also ensuring a safe level playing field for participants.

Ali Curi: Adrian, what is the one big thing you hope listeners would take away from this episode?

Adrian Turton: I hope that listeners will understand that there’s a lot going on globally from a regulatory perspective, especially because of the new areas of innovation and change in the industry around ESG, AI, and cryptocurrencies.

UK in particular is actually still undergoing a massive change due to Brexit and its repeal of EU laws and creation of a new framework to cope with the hole that’s left. I think it will result in a sweeping change to the whole regulation and ensuring that the technology you have in place keeps pace with the rapid changes is more essential than it’s ever been.

Ali Curi: Let’s learn a little bit more about you. Tell us a bit about your background and what you’re doing now at ION.

Adrian Turton: I’ve worked for almost 30 years now in the financial services industry on both buy and sell side. I’ve worked or in the investment banking sector, I’ve worked in private wealth management, market making, and also on the software vendor side. I’ve worked from settlements areas through to the trader support and mid office of different companies, and then moved into project management for both business side and the software platforms. I joined Fidessa as a project manager in 2010, to do the implementation side at client sites, and then moved on to the business analysis and project management side in 2016. That was part of the Fidessa buy side team who were originally Latent Zero had been acquired by Fidessa.

And that was before the acquisition of Fidessa by ION. I now work as a Senior Product Manager and Business Analyst for ION Latent Zero as Fidessa buy side was rebranded back to Latent Zero during the acquisition.

Ali Curi: Great, thank you. Now, I often ask our guests some career advice or life hack questions that might benefit our listeners.

Adrian, the question for you is, what is a career move or career strategy you wish you had done earlier?

Adrian Turton: That’s quite a tough question. I think I’d probably answer it with a regret that I have. I had the opportunity to work in a different country earlier, a lot earlier on in my career, but I didn’t have any family or ties or house to worry about.

And I didn’t take the opportunity at the time. Later on in my career, I did get to work abroad quite regularly, and I really wish I’d taken that opportunity when it was offered. Working in a different environment allows us to grow much more quickly than in a place we know and understand. I think broaden your horizons and take those chances when they’re offered.

Ali Curi: I think that’s great advice. Adrian Turton, thank you, it’s been a pleasure.

And thank you for joining us. I hope you visit us again.

Adrian Turton: Thanks, Ali. It’s been it’s been fun.

Ali Curi: And that’s our episode for today. You can follow ION Markets on Twitter and LinkedIn.

Thank you for joining us. I’m Ali Curi. Until next time.