At the start of March, the FCA released a Dear CEO letter (the “Letter”) to asset managers and alternative investment managers regarding their supervisory strategy of firms in these sectors. Before we look at its contents, it is worth noting that the FCA has apparently retreated from its previous approach of treating mainstream asset managers and alternative investment managers separately (in February 2023 and August 2022 respectively). However, it is styled as an interim portfolio letter so we may yet hope that the FCA will pay attention to the very distinct issues that separate these two sectors.
The Letter was closely followed by the FCA’s Business Plan for 2024/25 which of course takes in its approach to regulated firms across all sectors. The FCA sees the priorities identified in the Letter as consistent with its three-year strategy (now entering its final year). However, in the Letter, it has taken the opportunity (in the context of heightened uncertainty and market shocks during 2023) to update asset managers on particular areas of regulatory focus.
FCA’s focus areas
Firms addressed in the Letter are expected to discuss its contents at Board level and consider how it applies to their businesses. In so doing, the FCA underlines the importance of good governance and the implications of assigning senior accountability over key risks identified, oversight by governance bodies, and appropriate management information to support good decision-making. The focus areas are as follows:
1. Setting and testing higher standards: the FCA wants to make sure that firms’ governing bodies are looking after investors’ interests particularly in periods of market disruption, stressed market conditions and through consolidations occurring in industry.
a. Assessments of value and Consumer Duty – It is six years since the FCA’s Asset Management Market Study introduced enhanced governance and product value assessments to Authorised Fund Managers (“AFM”). Its review of AFM’s assessment of value published in 2023, gave examples of good practice in this area. This concept has now been developed further under the Consumer Duty and, during 2024, the FCA plans to look at how asset managers have considered the price and value of products and services provided to unit-linked funds.
b. Change management – the FCA highlights two current areas where regulatory change presents challenges to firms particularly in respect of governance and appropriate resourcing for change programmes:
i. Operational resilience – noting in particular the requirements introduced by PS 21/3 building operational resilience. The FCA reminds in-scope firms (chiefly, enhanced scope SMCR firms) that they must have performed mapping and testing exercises no later than 31 March 2025.
ii. Sustainability Disclosure Requirements (“SDR”) and investment labels – the new set of requirements around ESG credentials that will apply in phases from May 2024.
c. Valuation practices for private assets – as flagged in September 2023, the FCA is conducting a multi-firm review of valuation processes within this sector with the objective of ensuring that valuations of private assets are robust and reliable in all market conditions. The review will look at personal accountabilities for valuation practices within firms, governance of valuation committees, the information reported to Boards and the oversight of these practices. This will be published in due course.
2. Reducing and preventing serious harm: the FCA will be closely monitoring firms with significant market impact – those that present idiosyncratic risks to the system or are identified as outliers. Firms are expected to have systems and controls in place to counter the risk that they might be used as a conduit for financial crime (including compliance with the UK sanctions regime).
a. Market integrity and disruption: buy-side firms are important participants in systems vulnerable to market stress. Problem areas include money market stresses, funds with liquidity/redemption mismatches, and the transmission of risk away from the banking sector. All the above can be exacerbated by large concentrations of positions and/or high degrees of leverage. Risk management practices must be sufficiently robust to deal with these such scenarios.
3. Supporting innovation: firms must continue to consider how technological innovation can be safely implemented and risks minimised. The FCA cites its work on fund and asset tokenisation with the Technology Working Group, which sits under the Treasury’s Asset Management Taskforce, as well as collaborating with regulators from other jurisdictions on Project Guardian.
4. Promoting competition and positive change: the FCA views high regulatory standards as contributing to the trust and confidence enjoyed by the UK financial services sector, which in turn facilitates international competitiveness and growth.
a. Policy priorities:
i. Implementation of the Smarter Regulatory Framework, affecting the migration of MiFID, AIFMD and UCITS into the FCA Handbook. This will include making AIFMD requirements more proportionate, updating the regime for retail funds and supporting technological innovation.
ii. Consultation on a replacement for PRIIPs.
iii. Improving support to consumers under the Advice Guidance Boundary Review.
b. Modernising the Fund Authorisation process and cross border access – the enhanced Fund Gateway will open this year, recognising new offshore funds from equivalent jurisdictions (notably the EEA) to be marketed into the UK.
c. International engagement – the FCA commits to ongoing work with bodies such as IOSCO and the FSB in developing international standards in this area.
Cosegic comment: For the most part, the Letter repeats or amplifies many familiar themes from the regulator. However, news that the FCA is proceeding apace with work on revising certain aspects of UK AIFMD, including reconsidering elements applicable to sub-threshold AIFMs, is probably the most interesting part of the Letter, confirming as it does the speech by FCA Chair, Ashley Alder, last October. We are expecting a full consultation on this in the second half of 2024.
