FCA publishes a strategy update for asset management and alternative firms

What does this relate to? On March 1, 2024, the UK's Financial Conduct Authority (FCA) issued a portfolio letter addressed to asset management and alternative firms with an update on its supervisory strategy. This letter reflects the developments that took place since the last update in February 2023 and sets out the FCA’s goals for the year. The portfolio letter is intended to provide the relevant firms with clarity on the FCA’s supervisory priorities. 

What should you do? The letter is a reminder that the asset management and alternatives sector remains a focus for the FCA. Senior managers should review the letter carefully to understand the areas which are relevant to their business and where needed make changes to reflect the FCA’s expectations. The FCA emphasises that it will pay attention to the actions taken by governing bodies and senior managers to comply with their responsibilities.

What are the key takeaways? For managers and advisers in the private markets sector the most relevant issues raised in the letter relate to firm governance, the review of valuations and ESG (in particular ensuring sustainability statements are not misleading). 

In more detail, the FCA has set out four main regulatory priorities:

1. Setting and testing higher standards

The FCA places high importance on the protection of investors’ interests, particularly in the context of an unfavourable and volatile external environment. The FCA is expected to scrutinise the way firms:

1. Conduct Assessments of Value (relevant for authorised funds);
2. Build and maintain operational resilience;
3. Implement and oversee ESG  activities (including those undertaken by third-party providers);
4. Maintain good practices for valuations of private assets.

The FCA has said that it will undertake multi-firm reviews in relation to points (1) and (4), examining firms’ practices. 

The portfolio letter mentioned the Consumer Duty, stating that the FCA will assess how the asset managers have “considered the price and value of products and services provided to unit-linked funds”. The FCA will issue a separate update for firms on the subject of the application of Consumer Duty to closed products and services from 31 July 2024.

Importantly, with regards to ESG, the FCA acknowledged that the anticipated regulatory changes in this field present a challenge to firms, as many are currently implementing cost-cutting programmes in response to the wider financial and economic environment. The FCA is committed to “work to establish firms’ preparedness” for the relevant developments, many of which are due to come into force at various points in 2024. The FCA has warned firms against making “exaggerated or misleading sustainability-related claims” and having a governance structure that is not structured appropriately to oversee and review the relevant activities. 

The focus on valuations is also emphasised by the broader review by the FCA into private market valuations – again highlighting the FCA’s focus on the private markets. 

2. Reducing and preventing serious harm

The FCA highlighted the importance of compliance with regulatory and legislative regimes aimed at countering the risk that a financial entity is used for criminal purposes, such as the UK sanctions regime. It set out the expectation that relevant firms should have robust risk management practices, as well as the necessary systems and controls in place. Managing and mitigating financial crime risk has been a focus for the FCA for many years and it is important firms review their policies and procedures in this area to ensure they are sufficiently robust. 

3. Supporting innovation 

The letter described the FCA’s recent involvement in work on fund and asset tokenisation, noting the importance of technological innovation to asset management and alternative firms.

4. Promoting competition and positive change 

The letter mentioned the work on regulatory initiatives the FCA anticipates being involved in. A particular example is the Smarter Regulatory Framework (SRF), focusing on MiFID, AIFMD and UCITS, on which the authority expects to “make significant process” this year. 

The FCA acknowledged the need to incorporate industry feedback in updating the framework and committed to ensuring this is included in the update. The FCA also expects reforms affecting disclosure for retail distribution of asset management products and the launch of the enhanced Fund Gateway system, which should facilitate the Fund Authorisation process and cross-border operation. 

Whilst presently the FCA confirmed that the areas of its regulatory focus remain aligned with its multi-year strategy, it should be kept in mind that this may change in further updates. 

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