Name
Global FinTech Guide
Country _ Name
United Kingdom
SectionTitle
Asset and portfolio management
Body
FinTechs belonging to this category offer asset and portfolio management services via an internet platform or software programs and usually manage and dispose of the assets of their customers long or short term according to their specifications without actually holding the property or the possession of those assets. FinTechs, which provide information about and access to overnight or time deposit accounts at national and foreign banks and which execute the transactions to these accounts, also belong to this category. Some FinTechs however only act on request of the customer.

Aside from that some FinTechs offer software or internet solutions enabling users to manage and plan their personal finances on their own by providing graphics, overviews and compilations of their financial data and sometimes indicating financial risks or opportunities, but without actually managing the assets.

Introduction

Attitude of the country towards modern asset and portfolio management services

FinTech platforms have played an increased roll in reducing costs and customer fees. AI systems are being increasingly introduced to improve returns and reduce fees, both for tracker funds and actively managed funds.

Although FinTech asset management is still at an embryonic stage, it is expected that FinTech will increasing challenge traditional asset and wealth managers as the technology becomes increasingly sophisticated. So far disruption in this sector has not been as noticeable as in the banking and Payment Services sectors. This may change as platforms are able to demonstrate good investment performance and better overall returns by reducing costs.

The FCA has concerns about potential consumer harm in the investment market, and the lack of understanding of risks by consumers for “self-directed investors” (consumer investors making their own investment decisions, without the benefit of expert advice). Recent research for the FCA shows that over half of investors using FinTech platforms have been doing so for less than three years. The research identified that newer FinTech apps have reduced the barriers to entry, via easier to use and more accessible mobile apps, low or no fees, low starting deposits and marking campaigns messaging appeals to ‘fear of missing out’ or focusing on these reduced barriers. Newer FinTech apps have given access to younger “self-directed investors” who behave differently the traditional market of older, wealthier investors. The newer, younger self-directed investors are more likely than previous generations to hold high-risk, high-return investment types, and who are often being drawn to high-risk, high-return investment early (such as investment-based crowdfunding, cryptocurrency, CFDs). Their investment decisions are more likely to be influenced by social media content.

The FCA’s concerns about consumer harm are not limited to the FinTech sector. The FCA has recently (July 2022) introduced new “Consumer Duty” rules requiring all authorised firms to act to deliver good outcomes for retail customers. The new rules will also apply to businesses providing their services through FinTech platforms.

Legal affairs

Obligations and requirements to provide asset and portfolio management, or ancillary services described above

The main framework for asset management activities in the UK is FSMA. Asset manager and dealing platforms are likely to be carrying on the regulated activities of arranging deals in investments, advising on investments, safeguarding and administering investments and receiving or holding money for clients. FCA authorisation (with appropriate permissions) will be required to carry on any of those activities.
 
Fund managers are likely to be carrying on the regulated activities of managing a collective investment undertaking and managi
ng an alternative investment fund. 

Asset management activities may be covered by various different areas of financial services regulation in the UK, depending upon the nature of the activity being undertaken.

Investment funds that are structured as collective investment schemes (“CIS”) must be authorised or recognised by the FCA to be promoted to retail investors in the UK. 

An authorised fund must be established in the UK and take the legal form of an authorised contractual scheme (“ACS”), an authorised unit trust (“AUT”), or an investment company with variable capital (“ICVC”). For marketing purposes, the fund must be categorised as an undertaking for collective investment in transferable securities scheme (“UCITS”), or a non-UCITS retail scheme (“NURS”), or a qualified investor scheme (“QIS”), or a long-term asset fund (“LTAF”).

Consumer investors into authorise funds are protected under the Financial Services Compensation Scheme (“FSCS”). 

A recognised fund is a fund that is established outside the UK and recognised by the FCA to be promoted to retail investors in the UK (subject to certain exemptions to the restriction on financial promotion). Recognised funds are not protected under the FSCS.

Obtaining FCA authorisation or recognition of a fund is onerous and the overall costs (including professional fees) are likely to be substantial (at least into the tens of thousands of pounds). The FCA’s direct fees for authorisation depend on the nature of the fund.

The Alternative Investment Fund Managers Directive 2011/61/EU (“AIFMD”) as on-shored into UK law, applies to the management of investment funds. It is the activity of managing investment funds (rather than the fund itself) which requires authorisation. The type of authorisation required depends on the nature of the assets within the fund, and the total amount of assets under management by the authorised manager (not the assets under management in each individual fund). A lighter touch registration regime applies to Small registered UK AIFMs, with total assets under management of €100m or less or €500m in total provided that the portfolios under management are not leveraged and that investors have no redemption rights exercisable for a period of five years following the date of the initial investment in the Fund.

The restriction on financial promotions will also apply to any communications making an invitation or inducement to engage in investment activity.

All FCA firms are subject to strict anti-money laundering obligations under the MLRs, and to general anti-money laundering obligations under POCA.

The FCA Handbook sets out rules for regulated firms for the conduct of business (including client care, best execution, suitability, etc), for the protection of client money and assets, marketing (in particular that financial promotion must be fair clear and not misleading, and other matters (including the soon to be effective new Consumer Duty that requires firms to act to deliver good outcomes for retail customers).

A complex matrix of fees apply for authorisation, depending upon the gross income of the firm, the amount of funds under management, and such matters as whether the permissions sought include receiving and holding client Monday and safeguarding or administering client assets. The fees can range from the low thousands of pounds into the hundreds of thousands of pounds. 

A firm applying to carrying on asset and portfolio management activities will also be required to hold adequate capital resources. The a
mount required will depend on various factors and may be anything from around £5,000 to into the hundreds of thousands of pounds. 

Additional comments regarding the legal situation for asset and portfolio management services or what FinTech’s must be aware of in this business area

N/A

Economic conditions

Market size for asset and portfolio management services and biggest companies in this business area

The UK has the largest asset management industry in Europe and the second largest in the World. At an estimated 37% of the European market, it is larger than the next three European centres (France, Germany and Switzerland) combined. 

The estimated value of financial assets managed in the UK is more than £11 trillion. About half of this is for non-UK customers. Retail/consumer investors (the main potential market for FinTech) hold an estimated £2 trillion of financial assets directly and £1.9 trillion through pension funds. The market size is growing at between an estimated 6% and 11% a year.

There are over 1,100 authorised asset management firms within the UK, employing more than 42,000 people. The UK population as a whole is 67.22 million, of whom about half are in employment (representing 75.5% of 16 to 64 year olds). 18% of the population is aged 65 and over.

It is difficult to estimate the size of the customer base for FinTech investment services. It is small compared with (for example) the percentage of the population with work or private pension investments. However, the customer base is increasing.

Additional comments regarding the economic situation for asset and portfolio management services or what FinTech’s must be aware of in this business area

Some sectors of the UK population saw a significant decline in income over the Covid pandemic. Average real wages (income adjusted for inflation) have seen a decline over the last decade, and the trend is expected to continue until at least 2026. UK households are currently (second half of 2022) facing high food and energy costs inflation, and increasing interest rates (increasing housing and borrowing costs). The combined impact of these various factors may reduce the amount of income available for many people to invest in the financial markets.

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