Interim update on FCA supervision of asset management and alternatives

In March 2024, the FCA published a “Dear CEO” portfolio letter updating previous letters from August 2022 and February 2023 covering the FCA’s alternatives and asset management supervisory strategy. The update reflects changes in the overall environment and work that the FCA has undertaken since those letters, as well as highlighting its areas of focus for this sector over the next year.

Current challenges
The letter comments on the issues faced by asset managers, such as increased uncertainty and several market shocks in 2023, alongside the FCA’s strategy to address them. The letter covers the FCA’s approach in regards to setting and testing higher standards, reducing and preventing serious harm, supporting innovation, and promoting competition and positive change.

Consumer Duty and Multi-Firm Reviews
The FCA says that it will work on, and assess, the Consumer Duty and it will undertake a multi-firm review with the life insurance portfolio, to look at price and value across the value chain and what actions firms are taking under the Duty to improve outcomes.

Sustainability Disclosure Requirements (SDR)
The letter also states that later in 2024, firms will need to implement the Sustainability Disclosure Requirements (SDR) and investment labels. The FCA highlights its commitment to establish firms’ preparedness by assessing how firms’ governance and resourcing of change programmes has considered and mitigated this risk (particularly firms’ preparedness for complying with Policy Statement 21/3) to ensure that potential harms to investors and markets are being appropriately addressed.

Valuation practices for private assets 
The FCA plans a multi-firm review of valuation practices for private assets. This review will examine the personal accountabilities for valuation practices in firms, governance of valuation committees, the information reported to boards about valuations and the oversight by relevant boards of those practices.

Supporting innovation
The FCA states it will continue supporting the Asset Management Taskforce to identify and use innovative new technologies for the UK asset management industry. To promote competition and positive change, the FCA has several regulatory enhancements planned over 2024, including working to implement the Government’s Smarter Regulatory Framework with a focus on MiFID, AIFMD and UCITS.

Governance and oversight
The FCA reminds regulated firms’ boards that they are responsible for the governance and oversight in ensuring their firm meets its regulatory requirements and expectations set out in this letter. Firms must take all necessary actions to ensure that senior managers are accountable for delivering on this.

Next steps for firms:

1. Review internal governance: Review the overall internal governance structure and who has been allocated responsibility for risks identified. Consider the oversight arrangements in place and whether the MI (management information) produced is sufficient to support good decisioning by senior management.
   
   
2. Review AOVs (assessments of value): Evaluate AOVs carried out on funds to ensure good consumer outcomes.
   
   
3. Enhance change management operations: Review change management operations to address the FCA’s concerns about harm to consumers and market integrity due to insufficient operational resilience. Is there sufficient resource in control functions (compliance, audit) to cope with the change agenda?
   
   
4. Prepare for SDR compliance: Review the state of progress regarding SDR preparations.
   
   
5. Evaluate private asset valuation processes: Ensure the valuation process for private assets is robust and transparent.
   
   
6. Review ongoing compliance with UK sanctions regime: Continuously review compliance with the UK Santions regmine and ensure that AML controls are robust. Ensure the FCA threshold conditions are being met.
   
   
7. Review liquidity practices: Ensure liquidity and related risk management practices are adequate, especially regarding highly leveraged and concentrated market positions.

Conclusion

Firms must take proactive steps to align with the FCA’s updated supervisory strategies and expectations. The responsibility for governance and regulatory compliance lies with the boards and senior management.

For those needing guidance and support, reach out to your fscom advisor or contact us through our website here.

This blog contains a general summary of advice and is not a complete or definitive statement of the law. Specific advice should be obtained where appropriate.