The FCA sends a Dear CEO letter to alternative managers

Background

The FCA alternatives portfolio encompasses a broad range of business models. It comprises FCA-authorised firms that mainly manage alternative investment vehicles (i.e., hedge funds or private equity funds) or directly manage and advise on ‘alternatives’ assets.

The FCA has written a Dear CEO letter as a part of updating its supervisory strategy and priorities for firms that form part of its ‘Alternatives Portfolio’. Within the letter is the FCA view of the key risks of harm alternative investment firms pose (to both markets and customers) and thus their influence on shaping the FCA supervisory priorities). Firms should also note that the previous risks outlined in the previous letter from the FCA in January 2020 continue to apply.

Key points

The FCA expect the boards of the applicable firms to consider which of the risks they identified in the letter are critical to their business and mitigate them accordingly, thus meeting the FCA requirements.

 

Putting consumers’ needs first

The appropriate levels of risk for target clients

  • Inappropriate practices as to firms marketing to mainstream investors (be they retail or elective professionals)
  • Investments meet client needs, and they are appropriate
  • Meeting all financial promotion rules to retail investors for alternative products
  • Meeting the necessary adequate suitability assessments for retail investors
  • Ensuring target markets are outlined for distribution channels to ensure the correct investors are in scope
  • The need to undertake qualitative and quantitative tests under COBS 3.5
  • The need to consider the new consumer duty

Please note, that firms can expect a questionnaire on all the above in the coming months

Conflicts of interest

  • Boards are asked to review all their potential conflicts and that these are managed and disclosed where necessary to minimise the impact on investors and markets
  • Address shareholder structure and any potential impact on governance

 

Strengthening the UK’s position in global wholesale markets

Market integrity and disruption

  • The need for a robust risk and liquidity management structure (especially in the light of current rising interest rates presenting further risks for alternative asset managers)
  • The FCA directs firms to ensure that risk functions are adequately resourced and fit for purpose

Market abuse

  • Reminding firms of their obligations under UK MAR

Culture

  • A reminder that FCA understanding the culture of the firms they regulate is central to their aims that a healthy culture is embedded in their firms

 

ESG – a strategy for positive change

  • Correct labelling where products are labelled as being ESG-focused
  • Reviewing all marketing materials surrounding ESG to ensure accurate disclosures
  • Being cognisant of the requirements disclosure rules for asset managers coming into effect for asset managers and owners in 2023


The Future

This ‘Dear CEO’ letter provides a good ‘heads up’ for alternative asset managers and the like. As such applicable firms should focus and act on its contents

As stated, such firms can expect a questionnaire on these topics in the coming months

 

Please contact Xcina Consulting for all your regulatory needs

The letter can be found here

 

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