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The FCA’s letter to CEOs of asset managers and alternative firms underscores the regulator’s unwavering focus on market integrity, consumer outcomes, and financial crime for 2025. The letter highlights the FCA’s priorities for the year, providing a clear roadmap to navigate the evolving compliance landscape. It also addresses the pressing challenges in these areas while creating conditions to promote growth in financial services.
The letter outlined three key supervisory focus areas:
- Supporting confident investing in private markets.
- Building firm and financial system resilience against market disruption.
- Securing positive outcomes for consumers.
With current geopolitical conditions making markets volatile, there’s a need for interconnectedness and operational resilience to ensure smooth functioning of markets. The FCA’s strategy will operate in parallel with the FCA’s international competitiveness and growth objectives of bolstering the UK as an international investment hub.
There’s a continued commitment to governance and senior management accountability, with a specific focus on private markets, market integrity and disruption, consumer outcomes, sustainable finance, financial crime, and market abuse.
Outside of supervision, the FCA aims to strengthen regulatory and data frameworks and engage in discussions to unlock capital investment and liquidity, accelerate digital innovation, and consider ideas to reduce the regulatory burden.
What supervisory priorities are under the FCA’s microscope this year?
Private markets
The UK is the largest centre for private market fund management in Europe, which has seen rapid growth over a number of years. The private market opportunities offer investors diversification and contribute to the UK’s growth agenda where companies obtain long-term capital to finance growth.
Increased numbers of asset managers are investing in areas including infrastructure, private credit, and venture capital. However, valuation practices for the private market assets aren’t as consistent or transparent as those for publicly traded assets.
The FCA notes that firms can fall victim to valuing private assets inappropriately. This occurs due to a lack of frequent trading and regular price discovery seen more often in liquid public markets. The FCA has released the findings from the multi-firm review conducted, and has stated that it’ll be engaging with firms and industry bodies based on their findings. It’ll also be considering the findings as it reviews current rules in the FCA Handbook. You should now be reviewing the detailed findings and planning your actions based on the FCA’s outlined expectations.
Inadequate management of conflicts of interest also increase the likelihood and severity of investor harm, particularly where firms operate multiple intersecting businesses, continuation funds, co-investment opportunities, or partnering with other financial institutions. The FCA will be kicking off a multi-firm review at firms managing private assets to assess their conflict-of-interest frameworks. The review will focus on governance bodies and lines of defence to ensure investor outcomes aren’t compromised. Updated procedures and controls are expected to be identified to mitigate conflicts of interest.
Market integrity and disruption
Since 2020, the FCA notes that the sector has shown resilience in navigating volatility despite disruptive events becoming more frequent. The Bank of England and FCA have published findings from the System Wide Exploratory Scenario (SWES) exercise, which explores how the UK financial system would respond to a hypothetical market shock. While the report noted enhanced resilience in the asset management sector, it also highlighted risks and vulnerabilities in the system.
The collective actions of non-bank financial institutions, the diverse investment and funding markets that are not subject to the banking prudential regime, can amplify the impact of a market shock, such as through ‘fire’ sales of assets. The FCA will focus its review on prudent risk management, liquidity management, and operational resilience, and improve procedures to strengthen oversight of market vulnerabilities.
Consumer outcomes
The FCA sets out several initiatives that are either underway or will commence this year, each of which focus on the delivery of good outcomes for retail clients.
- Unit-linked fund review: The FCA will continue to look at how asset managers have considered the price and value of their products and services across the value chain. It’ll also assess what actions firms have taken under the Duty to improve consumer outcomes and is set to publish its findings later this year.
- Multi-firm review of model portfolio services: This will establish how firms are applying the Duty to ensure investors are receiving good outcomes.
- Advice-guidance boundary review: The review aims to help consumers obtain the support they need to make informed financial decisions. The FCA wants to see firms use targeted support to better engage consumers and help them achieve better outcomes with their savings and investments.
- Product information regime: The FCA is currently consulting on a product information regime for consumer composite investments. The new regime will replace the PRIIPS regulation and UCITS disclosure requirements with a more flexible framework allowing information to be presented in a way that maximises consumer understanding.
Sustainable finance
The regulator will engage with firms that provide sustainability-related products, to ensure these align with the sustainability disclosure requirements’ labelling, naming and marketing rules.
Financial Crime and Market Abuse
Private assets can involve complex ownership structures, and the FCA warns firms to be alive to the increased financial crime risks and ensure their risk management frameworks are fit for purpose. There’s a supervisory focus on anti-money laundering controls in private market funds, so firms in this sector are more likely to find themselves the subject of an FCA review.
Next steps
The FCA instructs CEOs to discuss the contents of the letter with their governing bodies and senior managers to establish if the risks identified exist within the firm. They must also decide on how to implement appropriate risk management strategies to mitigate the risks.
In future engagements with firms, the regulator will evaluate whether they’ve taken necessary actions to mitigate the highlighted risks. Therefore, it’s important to document senior managements’ review of each item in the letter, identify any gaps, and establish remediation plans.
Regulatory engagement with firms in these sectors is clearly intensifying. Whether through multi-firm reviews or targeted exercises, such as the upcoming multi-firm review on private market valuation practices, it’s essential to ensure your firm is well-prepared.
How can Bovill Newgate help?
We have 25 years’ experience providing regulatory advice to the asset management and alternative investment sector. Our team includes ex-regulators as well as lawyers, consultants and compliance officers, so we know just what regulators are looking for.
Get in touch if you’d like to discuss how this letter might affect your firm.
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