Dear Chief Executive, | Release Date: 3rd February 2023

To read a longer summary of this Dear Chief Executive, click here.

To access the original FCA document, click here.

Short Summary

The Financial Conduct Authority (FCA) has issued a directive focused on the supervision of the Asset Management sector, managed by the Buy-Side Directorate. This letter replaces the strategy communication from January 2020 and highlights the roles of approximately 1,000 firms managing around £11 trillion in assets. The FCA’s supervisory and policy approaches are informed by global operational realities and overarching priorities.

The letter identifies potential harms that could arise from asset managers’ business models and the FCA’s plan to mitigate these through supervision. Key risks include the impact of economic challenges like the rising cost of living and market volatility, which may affect firms’ ability to deliver good outcomes.

Significant emphasis is placed on governance, with a requirement for firms’ governing bodies to be adept, well-informed, and proactive in overseeing risk and compliance. The FCA notes that previous governance failures were often root causes of insufficient risk mitigation.

The implementation of the New Consumer Duty, which aims to enhance how firms serve customers, is highlighted as a focal area. This includes adherence to the Duty’s expectations regarding product governance, particularly in ensuring that products and communications meet consumers’ needs effectively and are not misleading, especially concerning costs, target audience appropriateness, and distribution.

The letter also outlines the FCA’s focus on Environmental, Social, and Governance (ESG) factors in investment, the accuracy of related claims, and the integration of ESG considerations into asset managers’ strategies.

Firms are encouraged to review their practices against the FCA’s expectations and prepare for rigorous supervision, particularly concerning product governance, liquidity management, operational resilience, and financial robustness. The FCA plans to use upcoming reviews and regulatory updates to reinforce these expectations.

Key takeaways for asset management firms include the necessity to integrate the Consumer Duty into their operations, ensure robust governance structures, manage liquidity and operational risks effectively, and prepare for proactive FCA supervision focusing on these areas.