In March 2024, the Financial Conduct Authority (FCA) released two documents with its updated supervisory approach for the asset management and alternatives sector: the FCA’s 2024/25 Business Plan (the Business Plan), and a “Dear CEO” letter titled “Our Asset Management & Alternatives Supervisory Strategy – interim update” (the Dear CEO Letter).
The Business Plan details the regulatory agenda and strategic priorities for the upcoming year, and the Dear CEO Letter serves as a parallel resource to inform stakeholders of the FCA’s regulatory expectations and focus for the near- to mid-term. A particular focus of both publications is the FCA’s emphasis on accountability in assessing the effectiveness of firms’ governance, as illustrated by a statement in the Dear CEO Letter that the boards and senior managers of firms should take decisive actions to comply with the FCA’s requirements and mitigate any potential risks of harm.
Here we analyse the two documents and highlight areas where asset managers and those in the alternatives sector will want to monitor.
The Business Plan
In the Business Plan, the FCA reaffirms that it will uphold its operative objectives:
(i) protecting consumers;
(ii) ensuring the integrity of the UK financial system;
(iii) promoting effective competition; and
(iv) enhancing the international competitiveness of the UK economy.
In response to the changing external environment, the FCA has recognised three key challenges that it is currently monitoring: higher interest rates and persistent inflation; global financial risks (including the riskier market-based corporate borrowing and high levels of public debt); and geopolitical risks with the potential to cause severe disruption. The FCA expects to release further updates on how it measures performance against metrics in the summer.
To help address these external challenges in the next year, the FCA makes three specific commitments as part of its updated focus: reducing and preventing financial crime, putting consumers’ needs first, and strengthening the UK’s position in global wholesale markets.
In addition to its ongoing activities, the FCA also plans to initiate the following new actions to support the new focus:
- increasing investment in the FCA’s systems to utilise intelligence and data more effectively in targeting higher risk firms and activities;
- carrying out multi-firm work and market studies across various sectors to elevate standards for consumer protection, with a particular emphasis on supporting those in vulnerable circumstances; and
- encouraging innovation and supporting industry efforts towards T+1 settlement to enhance operational efficiency.
The Dear CEO Letter
This Dear CEO Letter serves as an interim update following the series of communications released in August 2022 and February 2023, which have progressively outlined the FCA’s supervisory strategies for asset management firms primarily engaged in managing or advising on alternative investment products. The Dear CEO Letter was issued in response to changes in the external market environment, especially in light of the heightened uncertainty and several market shocks experienced in the past year. It delineates the FCA’s supervisory priorities, noting that the FCA anticipates a “high volume of significant business and regulatory changes to be implemented in 2024.”
The table below outlines several critical areas that investment managers of private capital businesses should monitor closely.
Other Areas of Focus
- The FCA remains committed to rectifying shortcomings in authorised fund managers’ “assessment of value” governance, bolstering the application of the Consumer Duty, and mitigating operational disruptions that could adversely affect consumers.
- The FCA will continue collaborating with the Bank of England in the System-Wide Exploratory Scenario initiated in June 2023, an initiative that seeks to promote the regulators’ understanding of the behaviours of banks and non-bank financial institutions amidst periods of heightened financial market stress.
- The FCA will implement an upgraded Fund Gateway to facilitate new offshore funds from equivalent jurisdictions to be marketed into the UK, which will replace the Temporary Marketing Permissions Regime established post-Brexit.
- The FCA remains actively involved in providing thought leadership to organizations such as the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board (FSB) and endeavours to sustain the UK’s global competitiveness, a goal underscored in its Business Plan.
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