The FCA’s asset management priorities

March 2024

The FCA has published an interim update (PDF169 KB) to its 2022 and 2023 portfolio letters for alternative and mainstream asset managers respectively. The letter flags its upcoming areas of supervisory focus (areas where it will be scrutinising firms’ practices), and its policy priorities (areas it will prioritise in terms of new rules and regulatory change).

While many of the themes are carried over from previous letters, of particular interest are new areas of emphasis. These include the fair value of services provided to unit-linked funds, the management of regulatory change, and confirmation of a review of private asset valuation. 

The FCA has not provided updates on some priorities set out in its previous letters (such as CASS, financial resilience, and market abuse), but these are likely to remain ongoing areas of focus in day-to-day supervision. 

This article summarises the FCA's key focus areas and provides practical next steps for asset managers.

The FCA's full list of updates can be found in its letter (PDF 169KB). While good governance is reiterated as being an overall priority in general, even greater emphasis is given to firms' governance during times of uncertainty and change. The following points are of particular note:

Managing regulatory change: 

• FCA focus: While the FCA acknowledges the high volume of regulatory change, it is concerned about firms' approaches to change management and whether they are adequately resourced. This year, it will review firms' preparedness for regulatory change, including their governance and resourcing. Specific focus areas will include implementation of the FCA's Sustainability Disclosure Requirements (SDR), and firms' preparedness for complying with its operational resilience requirements.
• Suggested actions: Firms should pause and consider their overall approach to regulatory change and their maturity. This should include how they identify, capture and act on regulatory updates, the roles, responsibilities and resources that underpin the process, as well as the use of technology and tools. Increasingly, asset managers are looking to use technology to trace the end-to-end impact of new obligations on their policies, controls and risks in an automated fashion. Given the scale of the SDR implementation challenge, asset managers should consider whether they have sufficient resources — including considering the need for a specific change project with associated budget to bring a suite of labelled products to market.  

Consumer Duty and assessments of value:

• FCA focus: The FCA recapped that fund managers' assessments of value (AOVs) “remain variable” and flagged it will commence a review on the price and value of products and services provided to unit-linked funds later this year. This is particularly interesting given the FCA's previous reviews on unit-linked funds did not result in significant changes to the rules (aside from the broader Consumer Duty). The FCA stated it will release a separate communication for asset managers on the Consumer Duty in due course.
• Suggested actions: Fund managers should already have acted on the FCA's 2023 AOV supervisory findings (see suggested actions here). Firms should proactively revisit their Consumer Duty scoping and any existing considerations given to unit-linked funds — these should be reviewed in the context of the FCA's published good practice and areas for improvement. 

• FCA focus: The FCA noted its incoming SDR and reiterated its expectations on greenwashing. The FCA flagged the importance of good governance in firms' approaches to ESG — including being able to robustly review MI, third party data oversight and ESG claims.
• Suggested actions: Fund managers can follow KPMG in the UK's suggested actions to implement the SDR and should be prepared to comply with the FCA's anti-greenwashing rule and guidance by 31 May. Suggested actions include carrying out a product classification exercise, gap analysis, identifying where ESG terms are used in fund names and marketing materials, and reviewing the firm's approach to ESG governance and stewardship.

Private asset valuation:

• FCA focus: Building on its 2023 liquidity management review, the FCA confirmed it will undertake a multi-firm review on valuation practices for private assets. This will examine personal accountability, the governance of valuation committees, MI reported to boards, and their oversight.
• Suggested actions: Firms can follow KPMG in the UK's suggested actions to prepare for the FCA's review. These include reviewing valuation governance arrangements and policies and procedures, revisiting the identification and management of conflicts of interest, and considering whether there are sufficient skills and expertise across the first and second lines of defence.

Market integrity and disruption:

• FCA focus: The FCA will continue to work with the Bank of England on the System-Wide Exploratory Scenario, and also with IOSCO and the Financial Stability Board on money market funds (MMFs) and liquidity mismatch in funds. Its supervision will focus on concentrated positions in markets and highly leveraged positions.
• Suggested actions: MMF managers should track the outcome of the FCA's recent consultation, while all fund managers should already have revisited their liquidity management arrangements following the FCA's review last year (see suggested actions here). More broadly, firms should review their front office controls to ensure they meet the FCA's expectations.

In addition to the areas of supervisory focus above, the FCA also updated on its policy-making priorities, taking into account feedback on its 2023 discussion paper.

As part of implementing the government's Smarter Regulatory Framework, the FCA will essentially lift the UCITS, AIFMD and MiFID rules into its handbook. It is not anticipating any significant changes — except for the areas it identified previously (making the AIFMD rules more proportionate, updating the regime for retail funds and supporting innovation). 

The FCA also reminds firms of the ongoing advice/guidance review, its upcoming consultation to replace the PRIIPs regime, and its recent consultation on MMFs. It concludes the letter by flagging changes to its fund authorisation system and its role engaging with international authorities. 

Asset managers' boards should read, discuss, and act on the letter, documenting their response and any enhancements needed. If you need assistance with meeting the FCA's expectations in any of its highlighted areas, or to discuss KPMG's Regulatory Horizon scanning tool, please get in touch.