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FCA: five dangers to the investment industry

We share five key dangers for the investment industry identified in the FCA's Sector Views report

The role of technology in markets is growing at a rapid pace, but, along with increased efficiency, it can bring new challenges for companies to navigate.

That was a key message of the Financial Conduct Authority's (FCA) outlook for the investment industry this year in its annual publication of Sector Views.

We share five key dangers for the investment industry identified by the report.

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The role of technology in markets is growing at a rapid pace, but, along with increased efficiency, it can bring new challenges for companies to navigate.

That was a key message of the Financial Conduct Authority's (FCA) outlook for the investment industry this year in its annual publication of Sector Views.

We share five key dangers for the investment industry identified by the report.

Leave a comment!

Please sign in or register to comment. It is free to register and only takes a minute or two.

Failure of service providers

'All assets under management in this sector are held for safekeeping by a small number of ancillary service providers.

'Serious failure or disruption at one or more of these could result in widespread harmful side effects which could threaten stability and resilience.'

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Vulnerability of outsourced technology 

'Outsourcing to third party technology providers is growing, meaning that the proportion of assets potentially affected is increasing.

'Any increase in levels of outsourcing, which could exacerbate the likelihood of firm or technology failure, may be offset by increased regulatory focus on third party service provision oversight.'

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Cyber crime

'Technological failure or disruption, including from cyber crime could threaten market confidence and participation Barriers to successful cyber-enabled financial crime are reducing due to technological advances.

'This increases the availability and commoditisation of sophisticated cyber-attack tools.

'Gaps in controls and oversight could also make cyber crime attacks
more likely.'

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Poor decision making

'The proportion of assets invested through technology-led decision
making is currently small but growing.

'The speed of machine reactions could have serious consequences. If artificial intelligence using an algorithm were to make an inappropriate asset management decision, any resulting losses could be quickly compounded.

'Greater use of Big Data and developments in artificial intelligence
are likely to see growing use of machine-based decision making by asset managers in security selection, asset allocation and trade execution.'

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Illiquid funds

'The potential threat here is if contagion were to spread from
asset managers selling underlying less liquid assets in too great a
volume and at too low a price to meet redemption demands if these
increased unexpectedly.

'Evidence from events following the UK’s referendum on Brexit, when there was a spike in demand for redemptions from real estate funds, suggests, however, that the employment of liquidity management tools to avoid a sell-off of underlying assets was successful and resulted in no material consumer detriment.

'Despite concerns in this area it is worth noting that investments in
less liquid assets are increasing onlyat a slow rate.

'In addition, there have been moves by IOSCO and other regulators, including the FCA, to mitigate potential issues from funds invested in less liquid assets.'

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