Dear Chief Executive, | Release Date: 3rd February 2023
To read a shorter summary of this Dear Chief Executive, click here.
To access the original FCA document, click here.
Long Summary
The Financial Conduct Authority (FCA) has outlined a new supervisory strategy for the Asset Management sector within its newly integrated regulatory framework. This letter supersedes the previous strategy communication from January 2020 and highlights the FCA’s updated approach to supervising approximately 1,000 firms managing around £11 trillion in assets. This strategy is informed by a comprehensive review of risks, regulatory developments, and market conditions impacting the sector.
Supervisory Focus and Expectations
Governance and Oversight
The FCA emphasises the importance of robust governance, especially in the current volatile market environment influenced by economic challenges and rising living costs. Asset Managers are expected to have knowledgeable governing bodies that are well-informed about their firm’s risk exposure and can effectively oversee risk management processes. The letter identifies poor governance as a primary reason for firms’ failure to mitigate risks and protect consumer interests.
Product Governance
The FCA is concerned that some products may not adequately meet consumer needs due to inappropriate design, excessive costs, or misalignment with target consumers. The introduction of the New Consumer Duty aims to enhance the quality of financial products and ensure they deliver favourable outcomes for consumers. Asset Managers must review their product offerings and communications strategies to comply with these expectations.
Environmental, Social, and Governance (ESG) Focus
With the rising prominence of ESG investing, the FCA points out the risk of misleading claims about the sustainability and ethical impact of investment products. Firms are required to ensure accurate and reliable disclosures about ESG factors and must align their practices with upcoming regulatory requirements on climate-related disclosures and sustainability labels.
Product Liquidity Management
Concerns about liquidity mismatches in open-ended funds have been exacerbated by market stresses. The FCA expects Asset Managers to have effective liquidity management strategies that consider both exciting and remaining investors fairly. Enhanced scrutiny will be applied to funds with significant liquidity mismatches and those vulnerable to market stress.
Investment in Operations and Resilience
Operational resilience remains a critical concern, with potential service disruptions posing risks to consumer outcomes and market integrity. Asset Managers must maintain adequate operational capabilities and ensure reliable service delivery, particularly when outsourcing to third parties. The FCA will use various tools, including cyber and resilience assessments, to evaluate firms’ operational robustness.
Financial Resilience
The FCA continues to monitor the prudential health of Asset Managers closely, especially following the implementation of the Investment Firms Prudential Regime (IFPR). Firms are urged to maintain sufficient financial resources and review their wind-down procedures to mitigate the impacts of potential business failures.
Actions and Takeaways for Asset Managers
Review Governance Structures: Ensure that governance frameworks are capable of managing current and emerging risks effectively. This includes having expert members on governing bodies and establishing robust risk assessment processes.
Align Products with Consumer Duty Requirements: Evaluate product designs and distribution strategies to ensure they meet the needs of targeted consumer groups and comply with the New Consumer Duty.
Enhance ESG Disclosures and Practices: Prepare for stricter ESG reporting requirements and improve the accuracy of sustainability claims to build consumer trust and market integrity.
Strengthen Liquidity Management Practices: Develop and implement comprehensive liquidity management strategies to handle market volatility and redemption pressures effectively.
Invest in Operational and Financial Resilience: Prioritise investments in operational capabilities and financial resources to prevent service disruptions and manage economic headwinds.
Engage with Regulators: Maintain open lines of communication with the FCA and other regulatory bodies, especially in developing areas such as ESG and operational resilience.
Conclusion
The FCA’s letter to CEOs of Asset Management firms clearly outlines the regulatory expectations and supervisory focus areas for the upcoming period. Asset Managers must take proactive steps to address the highlighted risks and align their operations with the FCA’s enhanced regulatory framework to ensure they continue to provide positive outcomes for consumers and contribute to the overall stability of the financial markets.