FCA Issues Alternative Supervisory Strategy Letter
Posted on 1 Sep 2022
On 9 August 2022, the FCA issued a letter to alternative asset management firms outlining their new alternatives supervisory strategy. The FCA’s ‘Alternatives Portfolio’ of firms for which this strategy relates encompasses both firms which manage alternatives directly and firms which manage alternative investment vehicles.
The letter itself focusses on how portfolio firms specifically can approach the FCA’s 2022 business plan commitments, namely the priority areas of consumer needs, market integrity and Environmental, Social and Governance (ESG). These points are addressed in turn below.
The FCA have outlined their concern that informal governance processes, poor due diligence methods and inadequate investor categorisation is increasing the risk that investors are accessing products which do not match their objectives or risk appetite. The FCA have advised that firms can mitigate this risk by conducting thorough investor assessments, ensuring alternative investments are only offered to appropriate investor types and making sure target markets are clearly outlined. Firms that onboard retail or elective professional customers should have been instructed to review their processes to ensure they are effective, including the quantitative and qualitative tests for elective professional investors.
The FCA have also advised firms to consider the application of relevant marketing restrictions and to prepare themselves for the new financial promotion rules for high-risk investments (applying from 1 December 2022) and the new rules on the Consumer Duty (applying from 31 July 2023).
Further, the letter notified portfolio firms that a questionnaire will be issued within the coming months focussed on information about each firm’s business model, products, investor categorisations and associated control framework. Firms are advised that as part of this supervisory work, they will be expected to evidence the reasonable steps taken to ensure their firm’s target market is appropriately defined and not exposed to unsuitable levels of risk.
The letter has drawn attention to the need for firm’s risk management systems, controls and resources to be fit for purpose, with particular regard to firms that work with high leverage funds or concentrated / leveraged investment strategies. The FCA have advised that their analysis has shown that these firms can overestimate their liquidity position and it is therefore essential for them to have a robust liquidity management policy.
The letter has also outlined the FCA’s view of the relationship between culture and business practices; with a healthy culture seen as critical for consumer protection. With regards to this, the FCA have confirmed that the forthcoming supervisory cycle will look at how senior managers and firm’s policies influence an organisation’s culture. Additionally, a Consultation Paper is expected to be published later this year on diversity and inclusion which the FCA expects each firms’ board to fully consider.
Environmental, Social and Governance
The letter confirmed the growth of ESG based investments and the need for investors to have confidence in the products being offered. In particular, firms offering ESG products should ensure that documentation of such products are clear, not misleading and that the firms’ actions match the stated claims. Separately, the FCA have reminded firms to review and implement the new rules published in December 2021 to make disclosures in line with those recommended by the Taskforce on Climate-related Financial Disclosures (TCFD).