Dear clients and friends,
On 1st March 2024 the FCA published their interim update on its asset management and alternatives supervisory strategy.
In this alert we highlight what we believe to be the more applicable and impactful topics for our clients and contacts.
Governance
The FCA’s first key point is to highlight, not unsurprisingly, that good governance is always important but particularly during times of heightened uncertainty as had been the case throughout 2023, with a volatile geopolitical and economic environment and high volumes of business and regulatory change. The FCA will continue to focus on governance and risk management and oversight, believing that failures will lead to poor outcomes for investors and customers, reputational damage, and decreased resilience.
Can your firm demonstrate appropriate oversight? Be sure to double check and, where necessary, refresh your statements of responsibility – and ensuring appropriate management information is collected, collated, reported, and recorded will be key. A current risk register and completed ICARA will also help demonstrate robust governance arrangements.
ESG
No broad, sector-based regulatory communication would be complete without a reference to ESG, and the FCA does not disappoint – there’s the obligatory reference to the Sustainability Disclosure Requirements and investment label regime (“SDR”) which firms should be implementing this year. The FCA will hone in on governance and management information (again!) and third party ESG information providers used – the FCA will be concerned where firms make exaggerated or misleading sustainability related claims.
Is your firm ready to demonstrate compliance with the new rules? Judd Advisory is already working with clients on the SDR and in particular the anti-greenwashing rule, by reviewing marketing materials and amending or creating policies, procedures and checklists.
Private Markets Valuation
One theme carrying over from 2023 is the FCA’s intention to review valuation practices in private markets amidst a higher interest rate and tighter credit environment. The FCA has reconfirmed that it will carry out a multi-firm review examining valuation practices for private assets. The outcomes of the work will be communicated by the FCA for the benefit of all.
Is your firm ready to have its valuation policies and procedures judged? This includes allocating personal accountability for valuation practices firms (again, ensure statements of responsibility are up to date!), appropriate governance of valuation committees and management and oversight of valuation practices.
Consumer Duty
In addition to the above, the FCA will continue to focus on the consumer duty (the duty will apply to closed products from the end of July 2024 so work may not be quite finished yet!) and assessments of value, following the FCA’s multi firm review of authorised fund managers’ (AFMs) – not to be confused with alternative investment fund managers (AIFMs) – assessment of value practices.
Can your firm demonstrate that the impact of the consumer duty was fully assessed, and the applicable elements implemented? It was not as simple as saying that without retail clients it doesn’t apply, there was a much more nuanced assessment required. Perhaps strategy has changed, or new products launched since. The Consumer Duty analysis and on-going review should be documented and notified to the board / management committee.
Next steps and takeaways
CEOs of firms operating in this sector should discuss the letter with their firm’s governing body and should consider whether the risks of harm referenced above are present, and then adopt strategies to mitigate them where appropriate.
It is and always has been important for firms and their Senior Managers to take heed of these communications from the FCA and to be able to show that they have duly considered them. However, such communications and their due consideration may take on added importance in the light of FCA consultation CP24/2 – Our Enforcement Guide and publicising enforcement investigations – a new approach, wherein the FCA proposes to proactively publish more information about its enforcement investigations and their opening and progress…including publication of the identity of the subject of the investigation where it is in the public interest to do so, and if there are no compelling legal or other reasons not to! This is a marked change from the FCA’s current approach and seeks to act as an added deterrent to misbehaviour and misconduct.
Comments on the proposal are due by 16th April 2024 and, in our opinion, the FCA will receive much feedback on these controversial proposals which, if carried forward, have the potential to cause catastrophic reputational damage to firms who – at the end of an investigation – are found to have done no wrong.
