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What has happened?

In March 2023, the FCA issued its first Dear CEO letter to asset management firms since it launched its new integrated regulatory structure. 

What are the key points of the letter?

The letter sets out how the FCA intends to supervise asset management firms and it supersedes the previous strategy letter, issued in January 2020.

These firms are asked to consider whether a number of risks of harm are present in them and to adopt strategies for mitigating them. In any future supervisory engagement with those firms, the FCA regulations will consider whether governing bodies and Senior Managers with accountabilities have taken appropriate action to ensure that consumers and markets are adequately protected from these harms.

Supervisory approach

The FCA regulations expects firms’ governing bodies to be composed of members with sufficient expertise, who receive timely and appropriate management information about risk, and who effectively oversee issues within their firms. The governing body should understand the level of exposure the firm has to the risks outlined in the letter.

Product Governance

A key risk for this portfolio is that the quality and value of product offerings, or the quality of communications with customers, do not deliver good outcomes for consumers or meet their needs. This could be for a range of reasons, for example, because the product carries excessive costs and charges, is not designed with the target audience in mind, or is distributed to the wrong type of investor. In July 2022, the FCA confirmed plans to bring in its Consumer Duty which is intended to fundamentally shift how many firms serve their customers.

It is also more than five years since the FCA’s Asset Management Market Study (AMMS). The AMMS was followed by the introduction of several remedies, including enhanced governance and product value assessments. Since the 2020 Dear CEO letter, the FCA has conducted several reviews which showed that AFMs had implemented some AMMS remedies, including adding Independent Non-Executive Directors to boards and reductions in some fees. The reviews also identified instances where further effort should be made.

Authorised fund managers’ assessments of their funds’ value

The FCA will follow up on its 2021 Assessment of Value review findings and seek to identify outlier firms, for example where firms do not apply all the minimum considerations, assess value at fund level rather than unit class, or where fund performance is assessed using measures that do not reflect a fund’s investment policy and strategy.

Environmental, Social, and Governance (ESG) and Sustainable Investing

The FCA’s supervisory activities will focus on the governance structures that oversee ESG and stewardship considerations and will test whether firms deliver on the claims made in their communications with investors. The FCA regulations will particularly focus supervisory activities on outlier firms that have been identified in previous supervisory activities or other ongoing surveillance.

Product Liquidity Management

The FCA regulations will continue to focus work on elements of the financial system that have shown liquidity vulnerability to market stress.

It is in the process of completing a liquidity management multi-firm review, will work with identified outliers to improve practices, and will expect firms to consider their own governance, oversight and controls in reference to the review’s findings.

Investment in Operations and Resilience

The FCA believes that firms should have appropriate measures to understand the operational health of their businesses and to be able to respond in a timely manner.

It intends to complete a range of proactive programmes to monitor and test Asset Managers’ ability to meet these regulatory requirements. It may select firms for further review, including through utilising cyber and operational resilience assessment tools and the intelligence-led penetration testing scheme (CBEST).

Financial Resilience

Firms should ensure they have sufficient capital and liquidity to operate, and that their governance processes allow for prudential health to be regularly and adequately assessed. The FCA expects them to aim to identify prudential concerns early and to take appropriate actions. They should seek to reduce the chances of a disorderly failure and should review their wind-down procedures in reference to the Wind Down Planning Guide and its Observations on wind-down planning, liquidity, triggers, and intra-group dependencies.

How can we help you?

Thistle Initiatives has supported firms for over 10 years as a trusted compliance and regulatory advisor. In addition to assisting you as-and-when, our team of specialists can serve as your right hand in meeting and complying with regulations. We understand the importance of staying up-to-date and compliant and are dedicated to providing the guidance and support needed to do so.

Are you looking for help with your FCA asset management supervision, implementation of the Consumer Duty or more general regulatory questions? Contact our specialist team now to schedule a free consultation.  Get in touch with us by calling 0207 436 0630 or sending an email to info@thistleinitiatives.co.uk.