Review into Smaller Asset Management Firms

Dear Clients and Friends,

The FCA published its findings (with a generous use of acronyms) from its recent review of smaller asset management firms (under £1bn AuM). As ever with these reviews, there is a significant read across for firms that aren’t classified as Smaller Asset Managers. The FCA acknowledges most firms are meeting basic regulatory expectations however, weaknesses were identified across three key areas:

1. High-Risk Investments (“HRIs”)

What was found?

• Many firms lack a proper understanding of the differences between the two types of HRIs, namely restricted (“RMMIs”) vs non-mass market (“NMMIs”) investments. RMMIs can be mass marketed to retail investors (subject to certain restrictions) and include investments such as non-readily realisable securities and peer-to-peer agreements. NMMIs cannot be mass marketed to retail investors (subject to certain exemptions) and include non-mainstream pooled investments such as hedge and private equity funds.

• Inadequate investor categorisation processes and lack of understanding of investor groups (High Net Worth (“HNW”), sophisticated and restricted investors).

• Weak appropriateness assessments and suitability assessments to ensure HRIs are only sold to clients if appropriate.

• Elective Professional Client (“EPC”) onboarding involved qualitative assessments with few questions and unclear assessment criteria, or overly simplistic, confirmatory questions.

• Gaps or incomplete processes found for when a client no longer meets the EPC status (i.e., failing to have a process to offboard clients who no longer meet the criteria for EPCs).

What now?

Review all processes relating to HRI, with a particular focus on investor eligibility and opt-up procedures. Ensure these are fully aligned with current regulatory requirements and that your firm can demonstrate a clear, consistent application. This includes verifying that only appropriate clients are granted access to HRI products, supported by robust assessments and documentation.

2. Conflicts of Interest

What was found?

• Missing, stale or inadequate conflicts registers, for example lacking information on mitigation and ongoing monitoring arrangements.

• Lack of clear identification / assessment processes to identify all potential and actual conflicts.

• Policies not tailored to specific business models or investment strategies.

• Senior management wearing multiple hats without proper conflict assessment – no assessment against the ‘Appropriate Resources’ threshold condition.

What now?

Conduct a thorough review of your conflicts of interest policies, registers, and the governance structures responsible for their oversight. Ask whether any unavoidable conflicts have been appropriately disclosed. Go further by benchmarking your approach against the FCA’s recognised good practices, which includes ensuring that senior management and compliance teams regularly review conflicts management arrangements.

3. Consumer Duty Compliance

What was found?

• Some firms had not considered or implemented the Duty at all.

• Firms failed to conduct annual board assessments of customer outcomes.

• Inadequate Consumer Duty reporting to boards, specifically a lack of formality and a lack of review processes. A lack of challenge from senior management was also highlighted.

• Lack of understanding regarding application of the EPC categorisation processes (i.e. firms that encourage a customer to seek a ‘professional client’ classification to avoid giving the protections afforded to retail clients are in breach of the Duty).

The FCA specifically called out firms offering:

• Complex, high-cost investment strategies, unsuitable for retail investors.

• AIFs with unclear structures and opaque charging.

• Products with significant management fees leading to investor losses.

What now?

Now is the time to assess, either for the first time or as an update, how the Duty applies to your business. Just because you don’t have retail clients does not give you a pass. Document and submit the assessment to the appropriate governance body.

Separately from business development teams, conduct an independent review of the opt-up process. Is it functioning effectively? Does it capture the necessary information and ensure that only truly eligible elective professional clients are opted up? Be alert to the risk of ineligible individuals, such as friends and family, being incorrectly categorised.

In conclusion,

Overall, the FCA expects smaller asset managers (and those with relevant read-across) to strengthen controls around high-risk investments, conflicts of interest, and Consumer Duty obligations, especially where retail exposure exists.

You should review governance, client categorisation, and financial promotion processes to ensure they are fit for purpose. We drafted the following questions to kick off your self-assessment.

1. What processes do you have for ongoing monitoring of EPC status and offboarding when clients no longer qualify?
2. How do you ensure your EPC categorisation process doesn’t encourage clients to opt for professional treatment to avoid Consumer Duty protections?
3. When was the conflicts register last updated and does it include all relevant mitigation and monitoring information?
4. Can you evidence review and challenge of the conflicts register by senior management?
5. Where senior staff hold multiple roles, how do you assess and mitigate potential conflicts, particularly around the ‘Appropriate Resources’ threshold condition?
6. Are processes for categorising retail investors (e.g. HNW, sophisticated, restricted) clearly documented, consistently applied, and subject to regular review to ensure ongoing appropriateness?

For many firms, this review confirms familiar pressure points. Nonetheless it’s a chance to anticipate what may come next and an opportunity to take stock. As ever, we’re keeping a close eye on regulatory signals like this and working with firms to make sure they’re well positioned.

Judd Advisory

June 2025