Asset Management Regulation UK Risk Academy

Asset management and regulatory compliance. The Financial Conduct Authority FCA regulates the asset management sector for both conduct and prudential purposes. Since the last financial crisis in 2007 2008 there have been some improvements in UK regulatory control to mitigate the risk of another financial crisis. However there are known and unknown risks building again. The financial system is vulnerable but how vulnerable?

Regardless of the macro economic risks asset managers need to be alert to the vulnerability of the fund and take appropriate action at the right time to achieve the funds objectives. Different funds will have different vulnerabilities to changing environment.

  • What do the investors expect from the fund? Are there expectations reasonable and aligned with reality?
  • What risk appetite do the fund managers have? Is the fund model stress tested to actual and potential market conditions?
  • How will the fund be managed to reduce the uncertainty surrounding the fund performance?

Institutional investors like pension funds and insurance companies are the biggest customers for investment companies.

The UK asset management industry is the biggest in Europe and is likely to remain so after Brexit. The threat to the UK asset management industry is not from Europe but America.


Perhaps the biggest risk in short term is the slowing global economy. Longer term big risk is the changing demographics not just in the UK but right across Europe Asia and indeed most of the world. How asset management organisations conduct themselves in the provision of investment opportunities will impact on not just the success of the firm but the success of society to manage changing demographic risks. The UK regulator will have to ensure that there is a consistent service across the asset management industry to help protect the individual consumer and the institutional investor.

Asset managers must develop better products and services over a longer period of time than has been witnessed over a long period of time. The must act in the best interests of the investors.


To achieve this asset managers must embed good risk management governance and compliance system to align with the risk appetite of the target investor and the asset management firm.

Helping investors and investment advisers with holistic conduct risk management


Investors need to be guided to invest in the most appropriate funds for their needs and attitude to risk. Innovative risk management tools can assist in a more transparent and successful asset management business.

What is almost certain is that there will be another major financial crisis

When is uncertain but roughly every decade there is a financial crisis in UK. Ten years after the last one we should not expect to make the same mistakes but we should prepare for another major risk event.

There have already been significant risk events in the financial services sector in UK and around the world. These indicate a poor risk management culture still persists in financial services firms.


Investment management firms must design risk management governance and compliance GRC processes that are effective at managing risk in a balanced way which aligns with investor expectations and asset managers risk management culture.

The investment risk needs to be managed to ensure the fund is performing in line with expectations and take appropriate remedial action at the right time if required.

A Risk Register records the significant risks in the investment fund after a clear risk assessment process and setting of risk management plan to protect regulatory capital


What a financial services firm risk assessment process looks like is less important than how it embeds its risk assessment process in the day to day decision making process of the business.

Other risks to integrate holistically into your risk management framework principles and risk assessment process

A holistic risk management approach will better integrate good risk management practices for a more through and effective management of all key corporate risks.

Credit risk

The risk of loss due to a debtors inability to pay. Create a liquidity policy which identifies the significant credit risks that may significantly impact on financial services business objectives. Your policy procedures and risk assessment process need to monitor and control credit risks including failure of significant counterparties failure of customers to pay fees and failure of fund to pay early redemption monies.

Credit risk Key Risk Indicators KRIs and Key Control Indicators KCIs should monitor and control credit risk. Credit risk management examples could include monitoring of credit ratings and interest rate fluctuations to identify when it is important to act and what to do when you should act proactively before risk event occurs. Risk control actions could include moving money from at risk organisations.

Market risk

The risk that the value of assets will decrease due to the change in value of the market risk factors. Common market risk factors include asset prices interest rates foreign exchange rates and commodity prices.

Asset managers should have clear market risk review process for significant assets or where asset aggregation market risk is significant in terms of risk tolerance and appetite for risk.

Operational risk

The risk of loss resulting from inadequate or failed internal processes or assets including people and systems or from external events. Operational risk management needs clear risk management framework risk assessment process and documented policy and procedures for compliance with your business best practices expected from risk owners and all employees.

Examples of operational risk include:

Operational Risk Description
Internal FraudMisappropriation of assets tax evasion intentional mismarking of positions bribery 
External FraudTheft of information hacking damage third party theft and forgery
Employment Practices and Workplace SafetyPoor employment law or health and safety compliance
Clients Products andBusiness PracticeMarket manipulation antitrust improper trade product defects fiduciary breaches account churning
Damage to Physical AssetsNatural disasters terrorism vandalism
Business Disruption and IT Systems FailuresUtility disruptions software failures hardware failures
Execution Delivery and Process ManagementData entry errors accounting errors failed mandatory reporting negligent loss of client assets

The business risk assessment process needs to identify the likelihood of a risk materialising as well as the impact of the risk. The result of the risk assessment should be recorded in Risk Registers to aid management and monitoring of key operational risks.

Regulatory risk

The business needs to scan the horizon for emerging regulatory risks which could impact on business objectives as well as monitor and review compliance with existing regulatory obligations.

Failure to comply with regulations could result at best in financial loss through fines and claims for compensation. At worst the reputational damage could be catastrophic from which there is no recovery.

Competition Risk

Branding marketing and value for money can all result in a business missing achieving or exceeding business objectives. Competing cost effectively will lead to a sustainable more prosperous future.

Key Employee Risk

There is a growing skills gap in many parts of the UK and in financial services in particular. Failure to have the right employees in the right place at the right time will negatively impact on business objectives. Managing this risk well will enable a business to seize and develop new business development opportunities in a compliant profitable way.

Developing the right recruitment and retention policy and procedures will manage key employee risk better. Many studies have shown that a diverse workforce builds in an inherent diversification of risk and can be more rewarding to build a more sustainable business in a rapidly changing business environment.

Investment Risk

The investment risk to the business includes the risk that costs and rewards of reduced or increased customers from the investment performance of funds under management.

Risk management is not about reducing risk. Its about reducing the effect of uncertainty on investors and on the financial services business. Taking the right level of risk with more informed decision making process is key to risk management in line with risk appetite.


Totally objective investment risk management is probably not possible or perhaps undesirable. Yes you need unbiased investment risk management advice but subjective investment risk management advice is necessary to ensure the investment outcome was clearly aligned with the facts and features of the type of investment.

Early redemption due to poor investment performance or increased investment funds due to higher than average investment returns will impact on asset management firms business objectives.

Conduct Risk

The risk that customer outcomes are good bad or indifferent. Investment returns can rarely be 100 percent guaranteed. However conduct risk is not just about whether the customer is happy or not with the financial product or service. You can be unhappy with the financial product but not breach any good conduct risk management rules. Similarly you can be happy with a financial product or service but break conduct risk management best practices.

Customers must clearly understand financial products or services to demonstrate good conduct risk management practice. The customer eventual outcome from the financial product or service must have been clearly transparent as possible from the outset regardless of whether the the value has increased or fallen.

Good conduct risk management requires the clear and evident provision of clear product or service information prior to and during delivery. This is achieved with appropriate electronic and paper documentation suitable reporting and adequate training of staff.

How the information is presented by the business and acknowledged or accepted by the customer must be reasonable for the type of customer including their level of understanding of the financial product or service.

The customer must be treated fairly. What is fair will depend in part who the customer is.


Institutional investors can for example be treated differently from individual customer walking in off the High Street with no knowledge of financial world.

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