FCA’s interim update to the asset management sector

With heightened uncertainty and several market shocks in 2023, many firms have been experiencing unprecedented challenges in raising and maintaining assets. Most firms have responded to this by cost-cutting and consolidating while evaluating new opportunities in the environment. This can sometimes shake the pillars of governance, culture and internal control environment within firms and, in fact, can make regulatory compliance tougher than before. 

The areas of focus that the FCA has discussed within the letter are consistent with the previous multi-year plan and provide clarity on their areas of regulatory focus for the year ahead. 

Through this insight, we aim to summarise the letter for you so your Board can address the relevant points efficiently. 

Change management

Operational disruption at firms has been one of the major concerns for regulators. In 2023, the FCA engaged with several firms to assess their preparedness for complying with Policy Statement 21/3 Building operational resilience.

Various gaps were noted in firms’ mapping of impact tolerances, risk identification and testing. With continued work on this, as well as further proactive engagement throughout 2024, the FCA expects ‘in-scope’ firms to be able to demonstrate that they remain within impact tolerances for each important business service this year. The deadline for implementation remains 31 March 2025, with plenty of work for the boards of firms to do. 

Valuation practices for private assets

Higher interest rates and a tighter credit environment have contributed the most significant pressure on the valuations of some assets. The FCA notes that a higher proportion of fund assets globally are now held in private assets where valuation practices are not as transparent as those for publicly traded assets. It is, therefore, vital that investors can trust that valuations are robust and reliable. This directly links to the FCA’s initiatives on liquidity management, and we will see further updates from the FCA relating to examining valuation practices for private assets. This includes examining the personal accountabilities for valuation practices in firms, governance of valuation committees, the information reported to boards about valuations and the oversight by relevant boards of those practices. 

Reducing and preventing serious harm

Diagnosing and addressing ‘harm’ is one of the key elements of an effective risk management framework. The FCA’s clear message is - ‘We expect to see robust risk management practices that address these issues and that appropriately account for potential market impact.’

This is particularly important when firms have large concentrated positions in markets, highly leveraged positions, and during periods of stressed conditions. Focussed reviews from the FCA will continue in 2024, with more emphasis on assessment of these through firms’ ICARA process. 

Assessment of Value and implementation of Consumer Duty

The multi-firm review of AFMs’ assessment of value (AoV) confirmed that progress has been made in implementing improved practices. However, the FCA will continue to engage with those firms with significant AoV deficiencies, using their regulatory tools as appropriate. Further, from 31 July 2024, the Consumer Duty will also apply to closed products and services. Firms should have started the necessary work to prepare for this deadline and have a clear roadmap to comply with the Duty.

Supporting Innovation

Whilst technological and digital innovation occurring across the world offers opportunities to positively transform business models and improve outcomes; firms need to consider how technological innovation can be safely and effectively implemented in the sector so that potential benefits are realised whilst risks are managed.

Promoting competition and positive change

The FCA has several regulatory enhancements planned this year for the asset management and alternatives sectors, including:

1. Consulting in a replacement regime for PRIIPS
2. Making significant progress on implementing the government’s Smarter Regulatory Framework with a focus on the MiFID, AIFMD and UCITS regime
3. Ensuring that changes made to the UK’s asset management regime are effective and proportionate, consistent with international standards, foster innovation and meet the needs of domestic and international investors
4. Modernising the fund authorisation process to make it easier for offshore funds from equivalent jurisdictions to be recognised in the UK.

UK’s regime for asset management

DP23/2 Updating and improving the UK’s  asset management regime will bring into force some key changes to the sector. Generally speaking, the following are the objectives:

1. To better meet the needs of investors, both domestic and international, retail and professional
2. Enable technological development, innovation and better use of data
3. Consistency with international standards and taking account of rules in other jurisdictions so that firms can continue to operate efficiently on a global basis
4. Effective and proportionate simplification and standardisation of requirements where possible.

Throughout 2024, the FCA will advance their agenda to ‘lift and drop’ significant parts of existing regulations. Therefore, you should take the opportunity to make changes to progress the three main priorities for reform identified through feedback: making the regime for alternative fund managers more proportionate, updating the regime for retail funds and supporting technological innovation.

The expectation will remain that the Board and Executive Committee are aware and have considered the impact of all regulatory matters and adopt strategies for effective implementation.  As CEO, you're responsible for ensuring that your firm meets FCA requirements, including the above-mentioned obligations and expectations. You should take all necessary actions to ensure these are met and reinforce accountabilities with your senior managers regarding these risks. 

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