FCA sets out asset management priorities

What does this mean?

The letter sets out the FCA’s supervisory activity and expectations for the asset management and alternatives portfolio of firms. It provides an interim update to the FCA’s portfolio letters issued in August 2022 and February 2023.

The regulator details its focus on the following priorities.

Assessments of Value (AoV) and Consumer Duty

The FCA will maintain its focus on AoV, and will follow up and take action against outliers to ensure AoVs are robust.

This year, the regulator says it will build on its previous AoV work and will assess, under the Consumer Duty, how asset managers have considered the price and value of products and services provided to unit-linked funds. It will undertake a joint multi-firm review with the life insurance portfolio, to understand price and value across the value chain, and actions firms have taken to improve outcomes.

Change management and operational resilience

In work carried out last year to assess firms’ preparedness for PS21/3: Building operational resilience, the FCA identified weaknesses and gaps in firms’ mapping of impact tolerances, risk identification and testing. It will continue to assess firms’ preparedness for the March 2025 deadline, and plans further proactive engagement throughout this year.

The FCA will assess how firms' governance and resourcing of change programmes (particularly firms’ implementation of the Sustainability Disclosure Requirements [SDR], and preparedness for complying with PS21/3) ensure that potential harms to investors and markets are being appropriately addressed.

Valuation practices for private assets

The FCA will conduct a multi-firm review examining valuation practices for private assets, including examining the personal accountabilities for valuation practices in firms, governance of valuation committees, the information reported to boards about valuations and the oversight by relevant boards of those practices. The regulator says this will building on the work it completed in 2023 on liquidity management.

Market integrity and disruption  

The FCA’s work to strengthen the resilience of money market funds, funds with significant liquidity mismatches, and the transmission of risk from the non-bank financial sector to the wider market will continue. It highlights its work with global standard-setting bodies, which firms should also consider.

The regulator says it will particularly focus on large, concentrated positions in markets, and highly leveraged positions. It expects to see robust risk management practices which address these issues and that appropriately account for potential market impact

Supporting innovation 

The FCA says it continues to support HM Treasury's Asset Management Taskforce to identify and harness potential innovative new technologies for the UK asset management industry, including tokenisation.

Promoting competition and positive change  

The FCA will undertake work to implement the Government’s Smarter Regulatory Framework, with a focus on progressing the migration of MiFID, AIFMD and UCITS into the FCA Handbook.

It says it expects to ‘lift and drop’ significant parts of existing regulation, but intends to take the opportunity to make the regime for alternative fund managers more proportionate; update the regime for retail funds, and support technological innovation

Fund authorisations and cross-border operations 

The FCA will launch an enhanced Fund Gateway this year. This system will initially be used to recognise new Offshore Funds from equivalent jurisdictions to be marketed into the UK.

What do firms need to do?

Firms should review the Dear CEO letter in detail. The focus and tone on ‘accountabilities’ of Senior Managers goes further than in previous years. Governance is critical to each of these areas, so firms should review each issue and ensure detailed discussion and ownership by the Board, reinforcing accountabilities across all Senior Managers. 

This should include proactively reconsidering work on AoV against the FCA’s previous feedback, focusing on price and value and the actions taken under the Duty to improve outcomes. The FCA has made clear in previous communications that a ‘static’ approach to AoV is not acceptable, and that it expects firms to develop and evolve their approaches.

Firms must ensure they have made any changes needed to governance and resourcing of change programmes, considering and mitigating change management risk (particularly firms’ implementation of SDR, and preparedness for complying with PS21/3: Building Operational Resilience).

Firms should urgently undertake a review of their valuation practices of private assets, including examining the personal accountabilities for valuation practices, governance of valuation committees, the information reported to boards about valuations, and the oversight by relevant boards of those practices.

In addition, firms should undertake a thorough review of their approach to liquidity risk management, focusing on strengthening the resilience of funds with significant liquidity mismatches.

The FCA repeatedly references an intention to focus on ‘outliers’ in its supervisory approach, driven by data. Firms should analyse the robustness of their data and FCA reporting, ensuring appropriate challenge and ownership by boards.

Next steps

The FCA expects CEOs to discuss the letter with the Board and Executive Committee, to consider whether the risks of harm set out in the letter are present in their firm, and to adopt effective strategies for mitigating them. The FCA makes clear that in future supervisory engagement with firms, it will consider whether governing bodies and Senior Managers have taken appropriate action to mitigate these harms.