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Dear Chief Executive | Release Date: 22nd January 2020

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

To access the original FCA document, click here.

Long Summary

This letter from the Financial Conduct Authority (FCA) presents a comprehensive outline of the supervisory strategy targeted at asset management firms. It underscores the critical function these firms play in the UK’s financial landscape, managing substantial assets on behalf of a diverse clientele including individual investors and large institutions both domestically and internationally. The letter emphasises the need for these firms to operate with the utmost integrity and efficiency, safeguarding and enhancing the capital and investments entrusted to them.

Detailed Examination of Key Risks and Causes of Harm

The FCA has identified several core areas where asset management firms may pose risks to their clients or to the broader market environment. These concerns necessitate vigilant regulatory oversight to prevent potential harm:

Governance and Management Standards: There is a notable deficiency in the level of governance across the sector. The FCA points out that many firms do not meet the expected standards, particularly in terms of their internal governance at the regulated entity level. This shortfall often leads to a lack of thorough consideration regarding the appropriateness of investment products for investors.

Operational Resilience and Technological Adequacy: The investment in technology and operational systems by many firms does not meet the robust standards required to protect market integrity or secure sensitive data. Inadequate systems could lead to disruptions in trading or breaches in data security, potentially causing significant harm to market integrity and client interests.

Client Assets Management: The management of client assets is another area where weaknesses are evident. Poor controls and oversight mechanisms increase the risk of financial loss for clients, which could arise from fraudulent activities or mismanagement.

In-depth Review of Supervisory Priorities

The FCA outlines several key areas of focus within its supervision strategy for asset management firms, each aimed at addressing specific risks:

1. Liquidity Management

Asset management firms are urged to adopt rigorous liquidity management practices. Given the nature of open-ended funds, which can experience mismatches between the liquidity of assets and redemption terms, it is crucial for firms to manage these risks proactively.

The FCA references recent communications, including policy statements and guidelines, which set forth expectations for liquidity management. Firms are expected to integrate these into their operational practices and ensure compliance.

2. Enhanced Firm Governance

Effective governance is crucial for ensuring that asset management firms operate in the best interests of their clients and maintain high standards of integrity and performance.

The FCA stresses the importance of robust internal discussions and challenges within firm boards, emphasising that governance should not be overly reliant on group-level structures. Each regulated entity must take full accountability for its regulatory responsibilities.

3. Integrity and Market Conduct

Firms are required to establish and maintain effective controls to prevent market abuse and other forms of financial misconduct. This includes having adequate systems in place to identify, prevent, and manage potential risks of market abuse.

The FCA has conducted assessments and provided feedback to firms, reinforcing the need for continuous improvement in market conduct and compliance with regulatory standards.

4. Product Governance and Investor Interests

The FCA calls for a heightened focus on product governance, ensuring that investment products are designed and managed with the investors’ best interests in mind.

Asset managers are expected to conduct thorough value assessments of their funds, ensuring transparency and fairness in product offerings. This includes a critical evaluation of fund objectives, fees, and overall value delivery to investors.

Concluding Remarks and Next Steps

In conclusion, the FCA mandates that asset management firms must take decisive and ongoing action to address the outlined risks and comply with regulatory expectations. Firms are encouraged to proactively engage with the FCA, reporting any significant issues or changes that could impact their operations or client interests.

Asset managers are also advised to prepare for broader regulatory changes, including those related to Brexit, ensuring readiness for new operational landscapes post-transition. The FCA commits to maintaining rigorous oversight and will not hesitate to enforce compliance to safeguard the interests of investors and the integrity of the financial markets.

Firms are urged to review their practices in line with this letter and take necessary actions to enhance their governance, operational resilience, and compliance frameworks. The FCA remains available for discussions and support, urging firms to maintain open lines of communication for any strategic or urgent issues that may arise.

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