Dear CEO | Release Date: 1st March 2024
To read a shorter summary of this Dear CEO letter, click here.
To access the original FCA document, click here.
Long Summary
The Financial Conduct Authority (FCA) has issued an updated supervisory strategy for the Asset Management and Alternatives sector. This comprehensive letter builds on the previous communications from August 2022 and February 2023, reflecting changes in the risk environment and outlining the regulatory focus for the coming year.
Sector Challenges and Responses in 2023
Asset managers experienced a tumultuous year in 2023, marked by heightened uncertainty and market shocks. Firms faced difficulties in raising and maintaining assets, leading to various strategic responses such as cost-cutting, consolidation, and exploring new opportunities. While there are signs of improvement, the volatile geopolitical and economic climate persists, with potential ongoing impacts on business models, products, services, and customer outcomes.
FCA’s Key Areas of Regulatory Focus
Good Governance in Uncertain Times:
- The FCA underscores the importance of effective governance, particularly in periods of heightened uncertainty.
- Firms are expected to manage and oversee risks effectively to avoid poor outcomes for investors and customers.
Assessments of Value and Consumer Duty:
- The FCA continues its focus on the Asset Management Market Study and the implementation of the Consumer Duty.
- A particular emphasis is placed on ensuring that firms comply with the assessment of value (AoV) requirements and the Consumer Duty’s standards.
Change Management and Operational Resilience:
- The FCA highlights the necessity for firms to adapt to Policy Statement 21/3, which focuses on building operational resilience.
- Firms must demonstrate preparedness for Sustainability Disclosure Requirements (SDR) and maintain robust change management processes.
Valuation Practices for Private Assets:
- Given the growing interest in private assets, the FCA stresses the need for robust and reliable valuation practices in all market conditions.
- The FCA plans a review of these practices, scrutinising governance, information reporting, and oversight mechanisms.
Reducing and Preventing Serious Harm:
- The FCA aims to reinforce its horizon scanning for emerging risks and ensure compliance with financial crime regulations.
- A particular focus is on adhering to the UK sanctions regime, with non-compliance potentially leading to significant repercussions.
Market Integrity and Disruption:
- The FCA will address vulnerabilities in financial markets, focusing on risk management practices concerning large, concentrated, and leveraged market positions.
- Collaboration with domestic agencies and international bodies will continue to strengthen the resilience of various funds and sectors.
Supporting Innovation:
- The FCA encourages firms to consider how technological and digital innovations can be implemented safely and effectively.
- The regulator is actively involved in projects exploring fund and asset tokenisation and seeks to work with global regulators on setting international standards.
Promoting Competition and Positive Change:
- The FCA is focused on enhancing regulatory frameworks in line with the government’s Smarter Regulatory Framework.
- Key reforms include updating regimes for alternative fund managers, retail funds, and supporting technological innovation.
Implications for Firms
Governance and Decision-Making:
- Firms are expected to have robust governance arrangements and senior accountability for risks.
- The FCA will assess the effectiveness of governance in handling identified risks and ensuring informed decision-making.
Adherence to Regulatory Changes:
- Firms must comply with AoV requirements and Consumer Duty standards, with a focus on product pricing and value.
- The FCA will assess firms’ readiness for SDR and operational resilience, expecting compliance by March 2025.
Market Conduct and Financial Crime Compliance:
- The FCA emphasises the need for firms to maintain market integrity and manage financial crime risks effectively.
- Compliance with the UK sanctions regime is critical, with failures potentially resulting in severe consequences.
Innovation and Technological Advancements:
- Firms should explore and incorporate technological innovations, ensuring these are aligned with regulatory standards.
- The FCA supports initiatives in fund tokenisation and collaborates with international bodies to standardise digital asset regulations.
Preparedness for Systemic Changes:
- Firms should be prepared for significant regulatory enhancements, such as migration to the FCA Handbook and reforms in fund management and disclosure regulations.
- The FCA will consult on reforms and seek industry views to enhance consumer support.
Take-Aways and Actions for Affected Readers
1. Ensuring Robust Governance and Oversight – Firms must ensure effective governance structures are in place, with clear responsibilities and accountability for managing risks and changes.
2. Compliance with Regulatory Requirements – Adherence to AoV and Consumer Duty, operational resilience guidelines, and SDR is paramount. Firms should engage in ongoing assessments and improvements to meet these regulatory standards.
3. Focus on Market Integrity and Financial Crime Prevention – Effective risk management practices must be in place to address market integrity and financial crime risks. Compliance with the UK sanctions regime is essential to avoid regulatory repercussions.
4. Embracing Technological Innovation – Firms should safely integrate technological advancements, aligning with FCA guidelines and global standards.
5. Preparing for Regulatory Changes and Reforms – Firms must be proactive in adapting to upcoming regulatory changes, including those related to fund management, disclosures, and international standards.
6. Engaging with Regulatory Developments – Active engagement in FCA’s consultation processes and staying informed about regulatory developments is crucial for compliance and strategic planning.
Conclusion
The FCA’s updated supervisory strategy for the Asset Management and Alternatives sector requires firms to navigate through a landscape of regulatory changes, market challenges, and innovation opportunities. CEOs and Boards are responsible for ensuring their firms’ compliance with FCA requirements and mitigating potential harms to investors and the market. Proactive and informed actions are essential for firms to align with the FCA’s regulatory focus and uphold the integrity of the UK’s financial system.