Greg Kilminster
Head of Product - Content
FCA speech looks at private market issues
In a speech at the Investment Association Annual Dinner, Nikhil Rathi, Chief Executive of the Financial Conduct Authority (FCA), touched on various pivotal themes shaping the UK’s financial markets, with a particular focus on motor finance and the growth of private markets.
Motor finance ruling raises legal and market concerns
Rathi began however by addressing the recent Court of Appeal ruling, which declared that commissions paid to car dealers by lenders for facilitating motor finance agreements must be disclosed to customers and their consent obtained. The court’s decision was grounded in the common law principle of fiduciary duty rather than FCA rules, creating potential uncertainty for the sector. As he explained, “the broker – the car dealer here – must act in the best interests of the customer and not put themselves in a position of conflict."
He acknowledged the complexities of this ruling, particularly for the two million people in the UK who rely on motor finance each year. Rathi noted that while lenders plan to appeal the decision, the FCA is focused on ensuring that customers are treated fairly under the law in the interim.
“We are encouraging firms to engage with us as they consider the impact the court judgment has on their products and services,” he said, commending the responsible approach firms have taken so far.
Private markets: opportunity or risk?
Turning to private markets, Rathi outlined the scale of the opportunity for UK investment managers, while also signalling the risks inherent in the rapid growth of these markets. Global private capital assets under management have tripled over the past decade, with the UK holding over half of Europe’s private markets assets under management (AUM).
Rathi posed an open question to the audience: “Should we aim to move sharply in the direction of the US, to deepen financing options for UK corporates? And what such a move would take?”
In his view, the UK must reframe its narrative around private markets. While acknowledging the risks, particularly around illiquidity, he emphasised the need for transparency. “We need transparency – particularly on data – to build a system-wide picture of risks, and to be clear about who owns them,” he said.
The FCA has introduced long-term asset funds (LTAFs) into the retail market, insisting on clear ownership of risks by both product providers and retail investors. Importantly, the FCA has opted to retain Financial Services Compensation Scheme (FSCS) coverage for LTAFs, even though this could result in a higher industry levy.
Technological innovation and product development
Rathi also addressed the importance of technological and product innovation in the evolving landscape of private markets. He highlighted the FCA’s authorisation of nine umbrella LTAFs and the growing role these funds are playing in supporting the UK’s transition to net zero.
Private market active exchange-traded funds (ETFs) are gaining momentum in the UK, alongside the continuing success of investment trusts. The FCA plans to consult on a new disclosure regime for consumer composite investments, including investment trusts, and is exploring options to make regulations more flexible than the inherited EU regime for packaged retail investment and insurance products (PRIIPs).
Looking further ahead, Rathi touched on the potential of tokenisation to democratise access to private assets, while reducing operational costs and enhancing liquidity. He cited a McKinsey estimate suggesting tokenised assets could represent a $4 trillion market by 2030, encouraging asset managers to adopt the blueprint developed in collaboration with the Investment Association.
“Tokenisation could democratise private assets, whilst lowering operational costs and enhancing liquidity,” he said.
The cost of value
Another key theme of Rathi’s speech was the question of value and fees. In the FCA’s consultation on the value for money framework for defined contribution pension funds, the regulator has shown its willingness to engage in a broader discussion about the true meaning of value.
Rathi made clear the FCA’s goal is to create incentives that encourage investment in higher-risk, long-term products that could ultimately secure better outcomes for consumers. This approach aims to balance risk and return in a way that supports innovation and growth within the sector.
Regulation and data
Rathi discussed the importance of a proportionate and enabling regulatory approach. Drawing comparisons to the US, where the Securities and Exchange Commission (SEC) has updated Form PF reporting to increase transparency for private fund advisers, Rathi highlighted the need for the FCA to develop a comprehensive market view.
“Currently, estimates for even basic metrics like private market AUM vary significantly,” he said, also indicating that next year the FCA will work closely with market participants on data collection as part of its review of the Alternative Investment Fund Managers Directive (AIFMD).
Rathi explained that a significant element of the FCA’s work is focused on governance, valuations, and conflicts of interest in private markets. “As access to these markets expands – potentially quickly – we can provide confidence in the underlying plumbing and be open about where significant risks remain.”
Nurturing talent
Rathi also took the opportunity to address the talent gap within the financial services sector, particularly within investment management. He shared insights from recent discussions with global asset managers, who praised the UK’s deep talent pool. However, the low representation of women within fund management – currently estimated at just 12% – remains a concern.
“We are the second largest international investment management hub,” Rathi said, “but only an estimated 12% of fund managers are women – a statistic that has barely moved in recent years.”
He called on the industry to invest in developing skills and capacity to better understand private markets, while encouraging a more diverse workforce to help sharpen the sector’s competitive edge.
In his closing remarks, Rathi reiterated the need for the industry to embrace the opportunities in private markets, while managing risks responsibly. Failure to do so, he warned, would mean “limiting returns for millions of savers and pensioners, writing off innovative start-ups who need capital to scale, stifling innovation, restricting job creation and dampening economic growth.”
With all the ingredients for success in place, Rathi urged the sector to seize the moment, ensuring that the UK remains a leading hub for private market investment. “Together, let’s make sure private markets rise to the occasion,” he concluded.
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Auditors face crackdown following ASIC report
The Australian Securities and Investments Commission (ASIC) has published REP 799: ASIC’s Oversight of Financial Reporting and Audit 2023–24, which provides key insights into the findings from the regulator’s financial reporting and audit surveillance, and highlights areas for improvement in audit quality and corporate disclosures.
Some context
ASIC reviewed 188 financial reports from both listed and unlisted entities, with 15 corresponding audit files from 11 audit firms. The reviews targeted key sectors, including financial services, healthcare, and transportation, to identify gaps in financial reporting and auditing. The report noted significant deficiencies in the treatment of revenue recognition, impairment testing, and sustainability-related disclosures. ASIC’s surveillance efforts were aimed at ensuring compliance with accounting standards and promoting quality financial reporting in the Australian market.
Key takeaways
- Impairment and asset values: ASIC identified significant issues with companies' assessments of impairment and asset values. Some companies were found to inadequately test for indicators of impairment or misclassify assets as current or non-current. In terms of auditing, there were instances where auditors failed to obtain sufficient evidence to support key assumptions in impairment models, raising concerns about the accuracy of reported asset values.
- Revenue recognition: A major focus of the report was the accuracy of revenue recognition. ASIC found that certain entities were not properly recognising revenue in line with the standards for accounting as either principal or agent, leading to discrepancies in financial reports. Auditors were also flagged for failing to design adequate audit procedures and test performance obligations for various revenue streams, resulting in potential misstatements in revenue and receivables.
- Sustainability reporting: The voluntary disclosure of sustainability and climate-related risks was also reviewed. Although many companies provided frameworks, such as the Taskforce on Climate-Related Financial Disclosures (TCFD), ASIC noted areas for improvement in the integration of sustainability metrics with financial disclosures. Despite this, no major concerns were raised regarding deceptive or misleading statements in these reports.
- Enforcement actions: ASIC took enforcement actions against several auditors and firms for failing to meet professional standards. These included the issuance of the first infringement notices related to audit rotation breaches, and proceedings that led to the suspension of an auditor’s registration for one year. The report highlights ASIC’s intent to continue rigorous oversight to ensure that both auditors and companies adhere to legal and ethical standards in financial reporting.
Next steps
ASIC has laid out its priorities for the 2024–25 fiscal year, which include expanding the scope of its financial reporting surveillance to registrable superannuation entities and further scrutinising auditor independence. The regulator has also committed to a proactive review of quality management frameworks implemented by audit firms, aiming to promote a culture of accountability and continuous improvement in audit quality.
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MAS announces Global Finance & Technology Network
The Monetary Authority of Singapore (MAS) has announced the launch of the Global Finance & Technology Network (GFTN), a new initiative which aims to facilitate Singapore’s position as a leading global FinTech hub by fostering international collaboration and driving innovation in financial services.
Some context
Singapore has long been a key player in the global FinTech landscape, with MAS playing a pivotal role in advancing the sector. The initial phase of FinTech growth in Singapore centred on experimentation and the introduction of initiatives such as regulatory sandboxes, digital assets, cross-border payment systems, and Artificial Intelligence (AI) integration. The Singapore FinTech Festival (SFF), an important platform for global FinTech collaboration, has been a highlight of this journey, positioning the city-state as a FinTech leader.
The establishment of GFTN seeks to build on existing efforts by MAS to enhance global connectivity and promote impactful innovation in financial services. The network will collaborate with MAS to advance industry and policy discussions in areas such as payments, asset tokenisation, AI, and quantum computing. This initiative also aims to further develop Singapore’s FinTech ecosystem and elevate the SFF to new heights as the premier global FinTech event.
GFTN will be chaired by Ravi Menon, Singapore’s Ambassador for Climate Action and former Managing Director of MAS. Under his leadership, GFTN is expected to guide Singapore’s FinTech ecosystem through its next phase of growth. The network’s strategies, governance structure, and specific functions will be detailed at a later date.
Sopnendu Mohanty, the current Chief FinTech Officer at MAS, will transition to his new role as Group Chief Executive Officer of GFTN in February 2025. Meanwhile, Kenneth Gay, who has served MAS for over 20 years, will take over as MAS’ Chief FinTech Officer, continuing to drive MAS’ FinTech efforts, particularly in payments innovation, asset tokenisation, and AI.
The creation of GFTN marks a pivotal shift in Singapore’s approach to FinTech, emphasising international collaboration and further integrating advanced technologies.
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First US National Inclusion Strategy published
The US Department of the Treasury has released its first National Strategy for Financial Inclusion aimed at expanding access to affordable financial services across the country. Prompted by a 2023 Congressional request, the strategy presents a roadmap for fostering financial resilience by improving inclusion, especially among underserved communities. The strategy outlines key objectives to promote a more equitable financial system.
Some context
In the United States, financial inclusion remains a challenge for many households. A significant portion of the population lacks access to affordable financial services, making it difficult for them to build financial resilience. Unbanked households, limited access to credit, and disparities in savings opportunities are just a few of the barriers many face. The Treasury's strategy seeks to address these issues by making financial services more accessible, inclusive, and affordable for all Americans.
Key takeaways
- Access to transaction accounts: The strategy emphasises the importance of providing access to transaction accounts for all consumers, particularly unbanked households. The Treasury believes government-to-consumer payments can encourage account openings, while financial institutions should offer affordable options such as BankOn accounts. The expansion of digital infrastructure, including mobile and broadband, is also seen as critical to increasing access.
- Availability of affordable credit: Addressing disparities in credit access is another central focus. The strategy advocates for integrating alternative data into credit scoring models, allowing individuals without traditional credit histories to access safer, more affordable credit. Expanding programmes that specifically target disadvantaged communities is also encouraged to promote fair credit distribution.
- Promoting savings and investments: The strategy suggests that employers and the government should offer better tools and incentives for savings, including retirement accounts and emergency savings plans. These measures aim to help individuals manage financial shocks while still building towards long-term financial goals.
- Government financial products and services: The Treasury calls for more inclusive government-backed financial products, recommending improvements in how they are designed and delivered. The goal is to ensure these services are accessible to all, particularly underserved populations, and that fees are kept to a minimum.
- Protecting consumers: Lastly, the strategy underlines the importance of protecting consumers from illegal and predatory practices. By enforcing consumer protection laws, regulators can ensure that financial products remain safe, transparent, and fair. Additionally, the strategy stresses the need for financial education to empower consumers to make informed decisions.
Next steps
The success of this strategy hinges on collaboration across multiple sectors. Financial institutions, government agencies, community organisations, and employers all have a role to play in promoting financial inclusion. The Treasury’s strategy is designed to be a dynamic framework that will be regularly updated to adapt to changing economic conditions and emerging trends. By working together, stakeholders can ensure that financial services become more inclusive, ultimately fostering a more resilient economy.
Click here to read the full RegInsight on CUBE's RegPlatform.