Regulatory scrutiny increases over Valuation practices by asset managers

Why did the FCA commission this review, and what were their concerns?

The motivations for commissioning this work appear to be twofold. Within its report, the FCA noted an increased interest in valuation practices in private markets globally, such as recent separate papers by the International Organisation of Securities Commissions (IOSCO) and the Bank of England on risks in private finance arising from lacks in transparency and consistency of methodology. In fact, on the same day the FCA published its findings, the Australian Securities and Investments Commission published their own discussion paper highlighting similar concerns.

Another motivating factor for the FCA was its eagerness to foster growth and innovation within the UK., which it aimed to support by promoting robust valuation practices to enhance fairness and build confidence in the sector.

What were its findings and recommendations?

The FCA documented many examples of good practice in firms' valuation processes, including:

• Good quality of reporting to investors
• Appropriate documentation of valuations (including methodology and assumptions)
• The use of third-party valuation advisers to introduce additional independence and expertise
• A consistent application of established valuation methodologies

Whilst the FCA noted that existing conflicts for private equity firms around fees and remuneration were well identified, it believed that conflicts more broadly – including investor marketing, secured borrowing, and asset transfers – were only partially identified and documented. They also noted that mitigations, such as fee structures and remuneration policies, had room for improvement.

Overall, the FCA stated an expectation that firms must identify, document, and assess all potential and relevant valuation-related conflicts. This includes evaluating their materiality and determining the actions they may need to take to mitigate or manage them.

How can we help?

As noted above, the use of third-party advisers had been explicitly noted by the FCA as an example of good practice. With an experienced team of valuation professionals, engaging Buzzacott can provide the following benefits:

• Expertise: as full-time valuation professionals who are well versed in financial reporting standards and IPEV / IVSC valuation reporting guidelines, we bring a robustness to the valuation work we do.
• Focus: we can take all, or part (as desired), of the valuation work off your hands, performing a detailed exercise while you focus on other activities.
• Quality and documentation: we can tailor-make our reporting to suit your needs whilst providing informative and transparent narrative as to our approach(es).
• Mitigation of conflicts: our independence provides assurance to internal and external stakeholders that valuations are prepared without undue bias.