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FCA Releases Asset Management Portfolio Tools Feedback

On January 13, the UK Financial Conduct Authority (FCA) released the findings of their multi-firm review of how asset management firms select, use and oversee the tools and models they use to manage portfolios (the Review).

The Review is a follow-up to, among other things, the Technology and Cyber Resilience Questionnaire, the results of which were published in November 2018 and are available here. The FCA’s concerns about operational resilience were exemplified in the TSB IT failure in April 2018, in which 1.9 million customers were unable to access their online accounts for up to a week. Operational resilience is a key cross-sector priority for the FCA, as set out in the 2019/20 Business Plan.

In the Review, the FCA visited ten firms in the asset management sector and met with senior executives from the first and second lines of defense to see how they selected and used risk modelling and other portfolio management tools. They observed three general approaches:

  • firms using an “integrated package” from a single provider

  • firms using “a suite of tools from different providers,” and

  • firms who build their technology in-house.

Firms who use a single provider observed that, while this approach tended to be less complex and more reliable due to consistent data handling, the potential drawbacks included concentration risk and resilience implications. Firms also felt that once they had chosen a single provider it would be very difficult to move to other providers.

By comparison, firms who developed their tools in-house found that it gave them greater flexibility and capacity to be distinctive but also that it was more expensive. Firms with in-house tools actively considered licensing their software to competitors.

The FCA also asked about different approaches to vendor management, model governance, change management, software testing, resilience and recovery, and customer expectations. In particular, with regard to resilience and recovery, the FCA observed that firms had “not given enough consideration” to how they would manage outages, especially if the outage were to last a long time or happen frequently.

The FCA expects other asset management firms to look at their operational resilience arrangements to ensure that they can comply with the Handbook and meet their regulatory obligations.

The findings are available here.

©2020 Katten Muchin Rosenman LLP

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About this Author

John Ahern, Financial Attorney, London, Katten Law Firm
Partner

John Ahern, partner at Katten Muchin Rosenman UK LLP and head of the London Financial Services group, focuses his practice on banking, financial services, UK and European financial markets, and related regulations. His background in private practice and as in-house counsel at a global investment bank provides him with perspective on the unique regulatory issues facing the wholesale and private banking sectors. John advises multilateral trading facilities, broker-dealers and banks on trading, clearing and settlement as well as custody of securities—both physical and...

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Carolyn H. Jackson, International Attorney, Katten Muchin law firm
Partner

Carolyn Jackson is a partner in Katten Muchin Rosenman UK LLP and is a Registered Foreign Lawyer. She provides US financial regulatory legal advice to a broad range of market participants, including commercial banks, investment banks, investment managers, broker-dealers, electronic trading platforms, clearinghouses, trade associations and over-the-counter derivatives service providers.

Carolyn guides clients in the structuring and offering of complex securities, commodities and derivatives transactions and in complying with US securities and commodities laws and regulations. 

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Nathaniel Lalone, Katten Muchin Law Firm, Financial Institutions Attorney
Senior Associate

Nathaniel Lalone, a partner at Katten Muchin Rosenman UK LLP, has a broad range of experience in the regulation of financial products and financial markets, and frequently provides regulatory and compliance advice to trading venues, clearing houses and buy-side firms active in the over-the-counter (OTC) derivatives, futures and securities markets. He is actively involved in advising clients on the implementation of MiFID 2 and MiFIR in the European Union as well as the international reach of US financial services regulation. He also has significant experience with structuring...

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Neil Robson, private equity fund managers counselor, Katten Law Firm, London
Partner

Neil Robson, a regulatory and compliance partner with Katten Muchin Rosenman LLP, focuses his practice on counseling hedge and private equity fund managers and other investment advisers on operational, regulatory and compliance issues. He regularly addresses Financial Conduct Authority (FCA) and EU authorization and compliance under both the EU Alternative Investment Fund Managers Directive (AIFM Directive) and MiFID, cross-border issues in the financial services sector, market abuse, anti-money laundering and regulatory capital requirements, formations and buyouts of...

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