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Brexit, rise in passive among U.K. watchdog’s priorities

Brexit, the rise of passive investment and the U.K. retirement market are among the key priorities for the U.K.'s financial watchdog in the current fiscal year.

The Financial Conduct Authority identified seven cross-sector priority areas and a number of sector priorities in its business plan for the 2018-19 financial year.

For the investment management sector, "an important contributor to the U.K. economy," with just over 8 trillion ($11.2 trillion) in total assets under management, the FCA identified a number of specific priorities, including the publication of research that explores the rise of passive investment.

"Given the rapid growth in the proportion of investor wealth managed passively, it is important for us to understand the economic implications of this development on both individual investors and U.K. financial markets generally," said the document. By the end of the financial year, the FCA plans to publish research exploring how passive investing impacts "core aspects of financial market performance such as corporate governance, market efficiency and financial stability," said the document.

Within investment management, the FCA said key issues also include poor quality and value for money of strategies, inadequate disclosure and lack of transparency, susceptibility to financial crime, as well as cyber and technological resilience risks.

The FCA said the U.K.'s withdrawal from the European Union — Brexit — "presents challenges in this sector. One important challenge would arise from any changes to the existing global regulatory framework that could make it harder for asset managers to delegate portfolio management from the jurisdiction of the fund to the jurisdiction(s) where portfolios are managed." The authority said it is "gathering intelligence" to understand the key changes to business models, planning assumptions and governance following the U.K.'s exit.

One of seven cross-sector priorities is pensions and retirement income, for which the FCA said it is developing a joint strategy with The Pensions Regulator. The two will work to "tackle the key regulatory risks facing the pensions sector in the next five to 10 years," with input from key stakeholders including the House of Commons Work and Pensions Select Committee.

"We recognize that this year we need to dedicate a significant amount of resource to withdrawal from the EU," said Andrew Bailey, CEO at the FCA, in a statement accompanying the document. "As a result, setting our priorities this year has involved a particularly rigorous level of scrutiny and challenge to focus on areas where we see the greatest potential for harm."