FCA Chief Highlights Global Regulatory Developments in Asset Management

In a speech delivered at the Investment Association Annual Conference 2024, Nikhil Rathi, Chief Executive of the UK's Financial Conduct Authority (FCA), outlined key international regulatory developments affecting the investment management sector. The UK, as the second-largest asset management centre globally, is at the forefront of these initiatives.

Rathi emphasized the importance of a strong, respected regulatory regime and consistent international engagement to maintain the UK's competitive edge in the £11 trillion industry. He highlighted several areas of focus:

1. Liquidity Risk Management: Following the "dash for cash" in March 2020, the International Organization of Securities Commissions (IOSCO) finalized guidance on anti-dilution Liquidity Management Tools. Rathi also mentioned ongoing joint work with the Financial Stability Board on stress tests for Open Ended Funds.
2. Leverage in Non-Bank Financial Institutions: The FCA, co-chairing a working group with the European Central Bank (ECB), is finalizing a stocktake of data and policy tools to monitor and address systemic risk from leverage. An industry outreach event is planned for June in New York.
3. Margin Preparedness: A current consultation aims to reduce procyclical behavior during market-wide stress by enhancing participants' liquidity preparedness and strengthening authorities' monitoring capabilities.
4. Valuations: The FCA is leading work to update principles for valuing Collective Investment Schemes and examining valuation practices in private markets, particularly governance and conflicts of interest.

Rathi also discussed the FCA's support for technological innovation, such as asset tokenization and AI in investment management. He emphasized the need for globally connected networks to fully realize the benefits of tokenization and highlighted the FCA's participation in Project Guardian, a collaborative initiative with regulators from Singapore, Japan, and Switzerland.

While acknowledging the transformative potential of AI, Rathi raised important questions about its impact on market integrity, concentration risk, and potential bias. He affirmed that the FCA's current approach relies on outcomes-based regulation and the senior manager regime to govern these advancements.

Rathi's speech also underscored the FCA's dual commitment to fostering innovation and maintaining robust regulatory oversight in an increasingly complex global investment landscape. He emphasized that the asset management sector, a "great British industry trusted round the world," thrives best when regulators and industry work collaboratively towards shared goals. This collaborative approach has yielded progress in areas such as the Long-Term Asset Fund (LTAF), tokenization, and ongoing regulatory reforms.

Moreover, Rathi highlighted the FCA's efforts to enhance its own operational effectiveness, citing improvements in authorization times and a significant reduction in the Financial Services Compensation Scheme levy. These improvements, coupled with the FCA's proactive stance on international regulatory developments, signal a forward-looking regulator committed to supporting the UK's position as a global leader in asset management while prioritizing market integrity, investor protection, and financial stability.

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