The FCA’s portfolio letter and supervisory priorities for asset managers

The FCA has published its latest "portfolio letter" (PDF 173 KB) and supervisory strategy for “mainstream” asset managers and fund managers, which supersedes the previous letter published in January 2020. The FCA's priorities for "alternative" asset managers were set out separately last year (see KPMG's summary here).

Underlying an overarching focus on good governance, the FCA's revised supervisory priorities include ESG, product liquidity management, product governance, investment in operations and resilience, and financial resilience. ESG and financial resilience are new priorities, while LIBOR transition and EU withdrawal have dropped off the list.

CEOs and boards need to take action to ensure that their firms meet the FCA's expectations. The FCA also noted that it would engage in a policy discussion with firms. In that context it has now published a wide-ranging discussion paper (PDF 713 KB) that seeks stakeholder views on updating and improving the UK regime for asset management

The FCA notes that ineffective governance can be a "root cause" of risks. It states that good governance "is always an expectation" and is particularly important given the current period of uncertainty. The FCA will therefore focus on assessing the effectiveness of firms' governance in identifying, considering and mitigating harms. It has identified five specific supervisory priorities.

1) Product Governance

The FCA reminds asset managers it undertook previous reviews on Assessment of Value and Product Governance which indicated areas where firms need to improve.

The FCA expects asset managers to meet the new Consumer Duty requirements where they "determine or have a material influence" over retail customer outcomes (see more on this in the FCA's sector-specific letter) (PDF 203 KB). Previously, we set out some of the key considerations for asset managers in the context of Consumer Duty. Firms will also need to consider the findings from the FCA's cross-sector review of implementation plans.

The FCA plans:

• To follow up on the 2021 Assessment of Value review findings, including considering ESG. The FCA will seek to identify “outlier” firms
• In 2024, to review the embeddedness of Consumer Duty, focusing on price and value
  

2) ESG and Sustainable Investing

The FCA expects asset managers to comply with its 2021 “Guiding Principles” and that larger firms will publish TCFD disclosures by end-June 2023. It encourages firms to assess the extent to which net zero commitments have been considered in transition planning.

Firms will also need to pay close attention to the outputs from the FCA's consultation on proposed Sustainability Disclosure Requirements (see KPMG's summary here), and conclusions from its discussion paper on sustainable governance, incentives and competencies (see here).

The FCA will:

• In the near future, publish the results of a review of some firms' ESG oversight practices
• Focus its supervisory activity on governance structures that oversee ESG and stewardship considerations and test claims made to investors.

3) Product Liquidity Management

The FCA is concerned that fund managers have not always overseen or used liquidity management tools correctly or consistently. It expects fund managers to treat investors fairly when meeting redemption requests. The FCA's future policy approach is likely to be determined by the conclusions from the Financial Stability Board's and IOSCO's work in this area — see here for a summary of the latest global developments. Its discussion paper also seeks views on amending its rules and guidance around liquidity stress testing and clarifying its rules on liquidity management tools.

The FCA:

• Is currently completing a liquidity management multi-firm review
• Will continue to work with the Bank of England to strengthen the resilience of the sector and certain types of funds

4) Investment in Operations & Resilience

Firms need to understand the "operational health" of their business and have sufficient oversight of third parties. Firms should review their policies and procedures and ensure they are meeting their incident reporting obligations, as well as the rules on business services and impact tolerances.

The FCA plans to "complete a range of proactive programmes" and may select firms for further review.

5) Financial Resilience

The FCA reminds firms that they should have sufficient capital and liquidity, good governance, and should comply with the CASS rules. Wind-down plans should be reviewed with reference to the FCA's wind down planning guide and observations. In January, we published the findings of our latest risk and ICARA Benchmarking survey, which provides useful pointers for firms.

The FCA will:

• Continue to assess firms' prudential health via data collection and will conduct targeted monitoring visits
• In H1 2023, publish initial observations on firms' IFPR implementation

These priorities clearly signal the FCA's areas of supervisory focus. CEOs and boards should review the letter to ensure they understand the FCA's expectations and compare their governance arrangements, as well as specific policies and procedures, with the matters set out in these areas of focus. Where necessary, firms should put in place actions to address shortcomings.

If you need KPMG's help in any of these areas, please get in touch.