FCA Supervisory Strategy Update Alert for Asset Managers & Alternatives Sector – March 2024

The Financial Conduct Authority (FCA) has issued an update to its supervisory strategy for asset managers and alternatives sector firms. This letter builds on previous communications and outlines the FCA's focus for the coming year, reflecting changes in the risk environment and regulatory priorities. The FCA emphasizes the importance of governance in light of recent market volatility and urges firms to assess the letter's relevance to their operations and take necessary actions.

Setting and testing higher standards

The FCA commits to ensuring that governance bodies of firms prioritise investors' interests, especially during market disruptions and industry consolidations. This includes a continued focus on effective governance to manage and oversee identified risks.

Assessments of Value and Consumer Duty

• Implementation of the Consumer Duty and focus on Assessments of Value (AoV) for better customer outcomes.
• Plans for a joint review with the life insurance sector on product and service value.
• Upcoming assessment of how asset managers consider price and value, with a focus on unit-linked funds.

Change Management:

• Concerns over operational disruptions and the importance of compliance with operational resilience guidelines.
• Concerns over firms progress to embed the FCA’s ESG Guiding Principles for sustainable investment funds, particularly around consumer communications.
• Reminder of the deadline (31/03/2025) for demonstrating the ability to remain within impact tolerances for important business services.
• Planned work this year to assess firms’ change governance, particularly relating to Sustainability Disclosure Requirements and PS21/3 readiness.

Valuation practices for private assets

• Upcoming review of valuation practices for private assets, focusing on governance, accountability, and transparency.
• Emphasis on the importance of reliable valuations in all market conditions.

Reducing and preventing serious harm

The FCA is intensifying efforts to reduce and prevent serious harm by enhancing its horizon scanning for emerging risks and ensuring firms meet threshold conditions. The focus is on closely monitoring firms with significant market impact or those presenting unique risks to the system. The FCA expects firms to implement effective systems and controls to prevent financial crime, including compliance with the UK sanctions regime. Top of Form

Market integrity and disruption

• Efforts to address system vulnerabilities to market stresses, including liquidity mismatches and the resilience of money market funds.
• Focus on risk management practices that consider potential market impacts.

Supporting Innovation

The FCA recognizes the potential benefits of technological and digital innovation in the asset management sector and is committed to supporting safe and effective implementation, including further exploring fund tokenisation. This involves collaboration with various working groups and international regulators to encourage innovation while managing associated risks.

Promoting competition and positive change

The FCA aims to promote competition and facilitate positive changes within the UK's asset management and alternatives sector. This involves regulatory enhancements, fostering international competitiveness, and ensuring the sector's global standing through high standards and effective regulation.

Policy priorities:

• Implementation of “Smarter Regulatory Framework”, including work on MiFID, AIFMD, UCITS, and consultations on alternative fund manager regimes, retail funds, and technological innovation.
• Expect to “lift and drop” significant parts of existing regulation, with an objective to better meet the needs of investors and enable innovation

Modernising Fund Authorisation and International Engagement:

• Launch of the enhanced Fund Gateway for recognizing new offshore funds and supporting international access.
• Active involvement in developing international standards and contributing to global discussions on asset management regulations.

Next steps

Firms are urged to discuss the letter's contents with their boards and executive committees, assess the relevance of identified risks, and develop strategies for mitigation. The FCA expects firms to take necessary actions to meet regulatory requirements and will evaluate these efforts in future supervisory engagements.

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