Asset management firms, including those managing alternatives, are considered a “priority growth sector” and are being apprised of the work the regulator is planning to undertake.
The letter highlights the volatile state of the financial markets more broadly as a key challenge for firms in this sector. And it suggests that existing interconnectedness, along with a reliance on third parties, means that “robust operational resilience” is important in ensuring “the smooth functioning of markets.”
Governance and culture are also being emphasized as critical to achieving “good outcomes during heightened uncertainty and change.” In connection with this the governance arrangements, including accountability by senior management, will be a key regulatory focus. To help firms, the FCA is promising to make good on its commitment to reduce the regulatory burden by making data collection more efficient and effective.
The FCA will focus its efforts in this sector on:
- private markets;
- resilience;
- consumer outcomes;
- sustainable investment;
- financial crime; and
- market abuse.
Private markets
According to the regulator the absence of trading and resulting regular price discovery for private assets leads heightened risk of inappropriate valuation and investor charges. To help firms the FCA will “shortly release” a multi-firm review on private market valuation practices and expects firms to review the findings in the report to ensure that “their valuation processes are robust, with a strong governance framework and audit trail.”
The FCA is also concerned about the management of conflicts of interest at firms both in the context of valuing private assets as well as more broadly, particularly where firms operate intersecting business lines, co-invest or partner with others. It is embarking on a multi-firm review focusing on how conflicts of interest are overseen and managed by firms that are managing private assets.
Acknowledging that there are “currently limited opportunities for retain investors to invest in private assets” the FCA acknowledges that product innovation in this area is ongoing and may result in greater retail investor exposure to such assets in the future. It is reminding firms who may not have a significant amount of experience dealing with retail investors of its consumer duty expectations.
Resilience
The increasing frequency and severity of disruptive market events is noted with the FCA responding by focusing its supervisory efforts on:
- prudent risk management;
- liquidity management; and
- operational resilience.
In connection with operational resilience specifically firms are asked to review not only their processes more generally, but also collateral management practices and oversight of third parties to whom services are outsourced.
Consumer outcomes, sustainable finance, financial crime and market abuse
The FCA’s multi-firm review of unit-linked funds is ongoing. This year the FCA will also start a multi-firm review of model portfolio services (MPS), focusing on the application of the consumer duty by firms.
Efforts on sustainable investments will centre on building trust in this market and ensuring that “products that are marketed as sustainable do as they claim, with the evidence to back up these claims.” The regulator plans to “engage” with firms who offer sustainability-related products in the first instance to identify outliers. But the thrust here is explicitly to “maintain and grow the UK’s position as a global investment hub” and so enforcement activity here seems less likely – particularly against the backdrop of broader challenges to the ESG sector globally.
The letter suggests that private assets carry significant risk connected with facilitating financial crime. The FCA expects firms to carry out “proportionate and risk-based due diligence” on investors and indicates that “robust” KYC checks are “particularly important” to identify ultimate beneficial owners. The FCA intends to review the effectiveness of financial crime systems and controls at firms with a focus on AML controls in private market funds.
Finally, the FCA expects all firms to have in place robust systems and controls to ensure compliance with market abuse regulations.
