FCA Issues Interim Update to Its Asset Management & Alternatives Supervisory Strategy

On March 1, 2024, the FCA published an interim update on its Asset Management and Alternatives Supervisory Strategy. These Supervisory-led communications often offer insights into the FCA buy-side Directorate’s list of priorities and reveal specific areas of focus for the FCA. The letter should be considered in parallel with the Directorate’s other recent correspondence, including the August 2022 Alternatives and February 2023 Asset Management portfolio letter. The main priorities of this interim update are:

• Valuations of Private Assets
• Product Value and the Consumer Duty
• ESG and sustainable investment
• Financial and Operational Resilience
• Regulatory Reform

Good governance remains the key area of focus, underpinning all the priority areas above. However, the FCA underlines how this becomes even more important given the changing nature of markets, the macro and geo-political backdrop and the need to address elements of the system that have shown (or could be subject to) vulnerability to market stress.

Private Asset Valuations

With ongoing multi-agency co-operation on the impact of non-bank financial institutions (NBFIs)—of which alternative asset managers play a significant part—the FCA intends to conduct a multi-firm review to examine valuation practices for private assets focusing on personal accountability, board reporting and oversight. We expect the “functional and hierarchical separation” of the decision-making processes to come under scrutiny for any firm involved in the review.

Continued Focus on Value

The Consumer Duty (the Duty) came into force in 2023 and rules for authorised fund managers (AFMs) regarding how they approached the assessment of value (AoV) were reviewed via a multi-firm review last year. The FCA’s ongoing focus on “value” continues in 2024, courtesy of an upcoming 2024 assessment of how asset managers have considered price and value of unit-linked funds.

All firms affected by the Duty, including life, pension and alternative asset managers, must ensure they are applying the value lens to its in-scope products on a proportionate basis, share that information with its distribution chain and continue to drive the agenda forward if they are to achieve “substantive compliance” with regulatory requirements.

The Importance of Operational and Financial Resilience

Operational and financial resilience have dual roles during times of market stress, as they are critical to both the orderly functioning of markets and the protection of client interests. Recent events (including the liability-driven investment (LDI) crisis) dictate that the FCA now has an even greater focus on asset management groups with particularly concentrated and highly leveraged positions. The FCA expects firms in this category to have robust risk management practices and prudential safeguards (including enhanced stress testing) to limit market impact in the event of significant drawdowns—or, in extreme cases, firm failure.

Ongoing Regulatory Reform

Finally, as part of the government’s Smarter Regulatory Framework, the FCA continues its agenda of regulatory enhancements to the MiFID, AIFMD and UCITS regimes. The letter indicates the following priorities: to make the regime for alternative fund managers more proportionate, update the regime for retail funds and support technological innovation. We expect more detail to follow on these issues throughout the remainder of 2024.

What Should Firms Do Now?

The FCA recognizes that this interim update reaches out to a broad range of regulated firms and that some areas highlighted in the update will not be applicable to all recipients. Firms should, however, review and discuss the contents of this update at the board and executive committee (or equivalent) levels, assessing the need for any adjustments to strategies in place to mitigate the risks raised.

How Kroll Can Help

Kroll’s award-winning Compliance and Regulatory Consulting practice can assist your firm in meeting its regulatory requirements and expectations while maintaining your own unique compliance program.  If you require any assistance with any of the items mentioned above or would like to learn more about how Kroll can support you, please reach out to your usual contact at Kroll or any of the contacts listed below.