FCA updates its supervision strategy
A precis
- FCA communicates its supervision strategy for 2025
- A review of the UK AIFMD this year (promise!)
- A (continued) focus on private markets – including the publication of results from valuation work (see our article on this) and an upcoming review of conflicts of interest management
- Attention on operational resilience (DORA-like compliance expectations?)
- Risk management review, targeting highly leveraged and illiquid strategies
- Consumer outcomes – the Consumer Duty is here to stay. A focus on information exchange across the distribution chains to better respond to outcomes.
- Targeted work on the following topics:
- sustainable investment – review of the implementation of the general anti-greenwashing obligation and SDR adoption (part of the oncoming wave of the backlash against the (ESG) backlash?),
- financial crime, (especially in private market transactions) and
- market abuse: some activity here in the liquid space in the last 12 months – expect a similar outreach to the private markets segment, including comprehensive questionnaires regarding (market abuse) systems and controls.
- Governance arrangements, ensuring Senior management accountability (for the topics noted therein.
Oh yes – and this all supports growth!
The Detail
On the 26 February, the FCA issued a Dear CEO letter to firms in the Asset Manager and Alternatives sectors, explaining its supervisory priorities for 2025. The letter’s opening gambit offers the following three key priorities:
Key priorities
- Supporting investor confidence (and thus targeted work) on private markets
- building firm and financial system resilience against market disruption, and
- securing positive outcomes for consumers
Supervisory approach
The FCA sets those priorities against the oft repeated refrain regarding good governance and culture (and the importance thereof). The FCA expects to see effective assignation of senior accountability for the priority risks (identified herein), in addition to governing body oversight and management information.
UK AIFMD Review
The promise of a review and consultation on the AIFMD is re-stated, including with a view to the streamlining of regulatory requirements and data collection. What this means is open for speculation; something profound like a change or harmonisation of the obligations for different AIFM types or simply a reduction or amendment to periodic or event driven reporting perhaps?
Current Supervisory priorities
The FCA provides a welcome update on the status quo, noting several topics on which it has, and will continue to, expend time over the course of 2025.
Private markets
Key amongst those are activities related to the private markets space. Speaking to what are, in its estimation, risks in judgment-based approaches to valuations, insufficient expertise resulting in poor fee outcomes, conflicts, and treating investors fairly (buyers, sellers and remaining) the FCA provides a fulsome rationale for the extended gaze here. With the pending publication of results from the FCA’s multi-firm review on private market valuation practices (and now, in fact, published: see here for Blueprint’s insights on that), firms are entreated to:
- Conduct a valuation review (with good governance and audit trails the key priorities)
- Ensure boards and valuation committees receive regular valuation management information
In new news, the FCA announces its intention to launch a conflicts of interest review in private markets firms. Given that conflicts of interest may arise where firms operate multiple intersecting business lines, continuation funds and co-investment opportunities, the FCA promises to:
- Assess how firms oversee Conflict-of-interest frameworks, including governing body review, and the three lines of defence.
- Seek up-to-date policies and dynamic (Conflicts) risk registers
- Focus on the ‘retailisation’ of private assets, including through the prism of the Consumer duty, for consumer understanding (information provision), and (cognisance of) firms’ specific role in distribution chains
Market Integrity and Disruption
Informed by the vulnerabilities identified in a System Wide Exploratory Scenario (SWES) review conducted with the Bank of England, the FCA will surveil prudential risk management, liquidity management and operational resilience controls – what it describes as ‘market vulnerabilities’.
The FCA promises to identify outlier firms and funds to seek assurances about risk management, with a focus on those with high leverage, illiquid, or concentrated investment strategies. Here, the FCA will look at both front and middle office (e.g., settlement and collateral) behaviours.
With respect to operational resilience, firms should ready themselves for an approach that may expect EU DORA like compliance disciplines. In other words, more structured, specific and timetabled systems and controls rather than the broad principle based FCA operational resilience rules. This signal provides further evidence that the FCA intends to, by way of supervisory review if not rule making, co-opt a broader set of firms into the scope of those (operational resilience) rules – which, as things stand, apply only to large firms such as banks, building societies and enhanced scope SMCR firms.
Consumer outcomes
Despite recent imprecise signals denoting a loosening or scaling back of the Consumer Duty it remains very much at the core of the FCA priorities. The FCA cautions that firms should continue developing their ‘monitoring capabilities’; by which we should read efforts should be redoubled to ensure outcomes are understood across distribution chains and information sharing improved.
Thematic reviews
Rounding off a busy schedule, the FCA announce ‘targeted work’ on the following the following topics:
Sustainable finance
Placing itself with the avant garde of the backlash against the ESG backlash, the FCA sees merit in supporting sustainable finance and so intends to pursue an agenda which includes review of the implementation of the general anti-greenwashing obligation and UK SDR adoption overall. Firms should guard against green but also AI washing risks. The latter is certainly a developing risk, as firms seek to utilise and exploit the shiniest of shiny new toys.
Financial crime and market abuse
With the identified flow of capital to private markets, the FCA expects firms to commensurately uprate financial crime risk controls. Comprehensive investor and deal AML due diligence and documentation is expected. With respect to market abuse, the FCA has been active in the liquid space in the last 12 months so firms should expect a similar outreach to the private markets segment, including comprehensive questionnaires regarding (market abuse) systems and controls.
Conclusion
Whilst the messaging is not entirely new, the portfolio letter ties neatly together many loose strands, presenting what is to come in the short to medium term. Thematic reviews on conflicts of interest, financial crime and market abuse in private markets are the FCA’s newly announced response to the continued growth of the sector. Further, work on SDR adoption illustrates that the UK (and in common with the EU) considers that sustainable investing should remain an important part of a growth strategy. Firms should consider the risks and rewards here carefully, as market sentiment and appetites fluctuate.
Dear CEO letters are a vital part of the FCA’s communication strategy, and this iteration provides a welcome clarity of messaging. There is, as such, no room for blissful ignorance. Firms should take note, ensuring that governing bodies of firms (of all stripes) are fully apprised of the topics noted and compliance teams prepared. Should you like to discuss the how, and wherefore, please do get in touch.
