Dear Clients and Friends,
Private Equity and Hedge Funds Under the FCA’s 2025 Strategy: Key Regulatory Changes and Expectations
Whilst a nod to the FCA’s growth mandate are threaded throughout the recent Asset Management CEO Alternatives Supervisory Strategy letter, the key focus remains the traditional risk areas for the sector. Whilst historically the chance of being swept into a thematic review was relatively low, it seems that the FCA does indeed have a spotlight on the alternatives sector. Given the increased likelihood of a request from the regulator it would be prudent to address each of the areas covered in the letter; we have set a summary of what we think are the key topics below.
Private Markets Valuation – What’s the FCA saying?
The regulator has concerns regarding the transparency of valuation methods, potential conflicts of interest, and liquidity risks within private markets. So, the FCA is closely examining how firms address these challenges to ensure fair investor treatment and the accurate pricing of assets. In 2024, the FCA launched a thematic review focused on valuation practices and has published their findings earlier this week.
What Judd is saying?
The FCA’s findings on valuation practices provides a useful benchmarking opportunity. Take the opportunity to objectively consider if valuation methodologies are transparent, well-documented, and defensible. Also reflect on the governance structure around valuation and assess if it puts client’s first and if you can be confident that there is informed oversight, challenge, accountability and clarity.
Financial Crimes Market Abuse – What’s the FCA saying?
Once again, the echo of Financial Crime Market Abuse reverberates through yet another FCA communication. The FCA is confirming (once again) its focus on anti-money laundering (AML) controls and market abuse monitoring, particularly within alternative investments and private markets. As part of this initiative, the FCA plans to assess the effectiveness of AML measures, with a specific emphasis on Know Your Client (KYC) procedures and the identification of ultimate beneficial owners (UBOs).
What Judd is saying?
Anticipate heightened supervisory scrutiny concerning financial crime especially around surveillance techniques. In 2025 we expect the FCA will be asking the firms:
- Are AML controls are appropriately proportionate to the risks inherent in the business, especially in private market investments?
- What mechanisms are in place to ensure that adopted market abuse surveillance systems effectively identify and mitigate risks? Is it calibrated correctly, have the right tolerances been set and has it kept pace with changes at the firm?
- When was the last time you benchmarked systems and controls for market abuse surveillance and AML processes? If it is more than 2 years, it is overdue.
Conflicts of Interest: What’s the FCA saying?
Standby for a multi-firm review into conflicts of interest at firms. The review will focus on how governance bodies oversee conflicts and assess whether existing frameworks are robust and effective in managing these risks. This initiative comes in response to growing concerns over potential conflicts that may arise in private asset management, particularly where firms/individuals have multiple roles or interests that could affect their decision-making.
What is Judd saying?
Firstly, get the fundamentals right and make sure the basic employee compliance (personal trading, OBIs, Gifts) etc is working well and records are current. As a priority and without fail, get the conflicts register up to date and reviewed by management committee now. If caught in the review – this will be top of your document request list.
Secondly turn to the bigger picture questions and get answers agreed, such as:
- How do we identify and assess potential confficts of interest within our firm arrangements and fund management activities?
- Do our governance frameworks effectively address and mitigate conflicts of interest, ensuring independent decision-making and fair treatment for all clients?
- Is our documentation clear and comprehensive in detailing the measures in place to manage?
Market Integrity and Resilience: What’s the FCA saying?
In a period of heightened global market volatility and geopolitical uncertainty, there is a greater emphasis on the critical need for firms to strengthen their operational resilience and business continuity arrangements. Given the interconnected nature of the financial sector, it is essential for firms to proactively identify potential vulnerabilities and implement strategies to mitigate disruptions, thereby protecting both their operations and the broader financial system.
What is Judd saying?
Following the CrowdStrike-related IT outages the FCA may be contemplating how far the operational resilience requirements should be extended. As an opening consideration, ask yourself:
- How do we oversee third-party service providers to ensure they do not pose operational risks to our business on both an initial and ongoing basis
The answer to that question will help you to start to identify operational risks and likely mitigants.
In summary, last week’s open letter is in some ways helpful in signposting the regulator’s priorities for the alternative sector – in particular a new spotlight on private markets – but it is also in many ways a rerun of earlier versions. Whether this leads to actual increased regulatory scrutiny or supervision is a very open question, we are inclined to think not based on past experience. Nonetheless, as the regulator continues to focus on these foundational elements, it is clear that a strong governance framework and a culture of accountability are a critical and constant thread of expectation.
Judd Advisory Limited.
March 2025.
