FCA sets out Supervision Strategy in letters to CEOs of Asset Managers

29 January 2020
By John Young (International Counsel)

The FCA wrote to the Chief Executives of asset managers last week, setting out its “Supervision Strategy” in terms of both the broad asset management industry and alternatives (hedge, credit, or private equity funds) industry. The letters are amongst a number of “Dear CEO” letters that the FCA has addressed to different sectors this year. Whilst some aspects of the letters are not relevant to private equity (or indeed the alternatives industry generally), and whilst UK private equity firms should not have immediate concerns as to renewed focus by the FCA on their industry, the letters provide colour on areas in which the FCA may expend supervisory resources in the year ahead including firm visits.

Areas of interest to UK private equity and venture capital firms are:

The FCA intends to review retail exposure to alternative investments - possibly in light of increased interest by firms in retail investment. In particular, the FCA says that firms should consider the appropriateness or suitability of investments for their target investors and identify the client type and investment need when manufacturing or distributing products, “recognizing that alternative products may only be appropriate for a niche market”. The FCA also reminds firms to “robustly” apply the client opt-up tests to elective professional status. The FCA here is mainly referring to MiFID rules that apply to distribution (where target investors are also the firm’s clients) – there is some doubt whether the marketing activities of UK private equity firms are in the scope of those rules.

The FCA states that market abuse controls across the alternatives sector have “significant scope for improvement”. It states that it may visit firms and provide individual feedback on the adequacy of their market abuse controls. The FCA advises that firms ensure that their market abuse controls are sufficiently comprehensive and tailored to their individual business models.

In the area of risk management, the FCA expects firms to operate robust risk-management controls to avoid excessive risk-taking, encompassing market risk, credit risk, liquidity risk “as well as more idiosyncratic risks in certain strategies, such as legal risk”. 

In relation to financial crime, the FCA states that firms should be alert to the risk that they may be used to facilitate financial crime and have appropriate and proportionate systems and controls. Of particular importance are due diligence on third parties (for instance, counterparties to transactions) and know-your-client (KYC) checks. The FCA intends to review firms’ systems and controls in this area, paying particular attention to money laundering and terrorist financing. Whilst the FCA’s focus on the importance of AML systems across the industry is not new, their comment on firms paying attention to due diligence on “third parties” may prompt firms to re-examine their existing processes.

In relation to Brexit, the FCA expects firms to consider how the end of the 2020 implementation period (31 December 2020) will affect firms and their customers and what action may need to be taken.