Last week, the FCA released findings from its review of smaller asset management firms and alternative investment business models, spotlighting the challenges many firms still face in fully meeting regulatory expectations. While the FCA acknowledges that most of the 410 firms reviewed (each managing less than £1bn in assets) are broadly compliant, there are concerns that firms could be at regulatory risk — particularly for firms navigating high-risk investments (HRIs), conflicts of interest, and the Consumer Duty.
Here’s what you need to know — and how Thistle Initiatives can support your firm to stay on top of these expectations.
The FCA looked at how firms offering HRIs approach product governance, financial promotions, and client categorisation. While many firms were able to define and classify products appropriately, there were cases where investor assessment processes may not have been robust enough to ensure suitability, particularly where HRIs were involved. Some firms failed to implement adequate investor assessment and categorisation processes. The FCA found weaknesses where HRIs were marketed without robust checks to confirm client suitability, breaching both product governance and financial promotion rules.
What is the risk? Firms without proper assessment controls may unintentionally expose unsuitable clients to inappropriate investments — a breach of both FCA expectations and consumer protection principles.
In reviewing how firms manage potential conflicts, especially in environments where individuals take on multiple roles, the FCA noted some variation in how consistently firms documented and reviewed those arrangements. Many smaller firms had inadequate controls to identify, manage, and disclose conflicts — especially where senior staff held multiple roles. In some cases, firms did not even acknowledge the potential for conflict, let alone document or mitigate it.
Why does it matter? A lack of conflict governance can compromise client outcomes, particularly in smaller teams where internal oversight is often informal. FCA expectations require firms to demonstrate that conflicts, where they cannot be avoided, are appropriately disclosed and managed.
The FCA acknowledged efforts being made to embed the Duty but noted that a proportion of firms are still in the process of aligning their business models with the Duty’s requirements. Many smaller firms have yet to fully engage with the requirements. The FCA noted that these firms have not adjusted internal processes to meet the Duty’s emphasis on customer-centric outcomes and good conduct.
What is the implication? A failure to embed the Duty could lead to enforcement action, reputational damage, and harm to clients.
The FCA is continuing to engage with firms following this review and will be monitoring ongoing progress in these areas. The findings are intended to serve as both a benchmark and a prompt for smaller firms to consider whether their frameworks are proportionate, documented, and effective in today’s regulatory environment. There is a clear expectation from the FCA, that all firms, regardless of size, must adopt the same high standards in governance, oversight, and client outcomes.
Firms are encouraged to revisit their approaches to governance, distribution, and client assessment in light of the topics raised.
Whether you're a smaller asset manager just getting to grips with these requirements or a more established firm seeking assurance, Thistle Initiatives can support you at every stage.
We can help you assess and strengthen your approach in the following ways:
Thistle Initiatives is dedicated to helping firms stay ahead in a dynamic regulatory environment and our expertise will guide you through every stage.
For more information on how we can assist, please get in touch with us today.
Anisha is a compliance specialist with over six years of experience in financial services, specialising in FCA regulations and OFSI sanctions. She has successfully implemented global compliance programs, introduced cost-saving monitoring systems, and ensured adherence to regulatory requirements.
Anisha's expertise spans sanctions analysis, regulatory risk mitigation, policy drafting, and compliance audits. With a proven track record in reducing compliance risks and managing high-stakes regulatory projects, she brings technical precision and leadership to every role.