On 3rd February 2023, the FCA published a ‘Dear CEO’ Letter to asset managers, setting out its supervisory strategy for the coming months, and highlighting its views on the key risks posed to customers and markets. The letter makes clear that the FCA will be active in the asset management sector in the coming regulatory cycle, and reminds firms that whilst good governance is always the expectation, during this period of heightened uncertainty (with the rising cost of living, volatile markets and a challenging economic environment), it is particularly important.
Next Steps
It will be important for firms to consider whether any changes need to be made in order to address the harms identified in the letter by the FCA to ensure that consumers and markets are adequately protected, and firms should expect greater FCA focus on assessing the effectiveness of firms’ governance in identifying, considering and mitigating harms.
Supervisory Priorities
The asset management supervision strategy focuses on the following key areas:
Product Governance: Since the FCA’s last strategy letter, it has identified that some remedies (e.g. reducing some fees, adding Independent Non-Executive Directors to boards) have been implemented, but more efforts must be made. The FCA intend to follow up on its 2021 Assessment of Value review findings, and identify outlier firms (e.g. 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).
The FCA highlights that the new Consumer Duty is core to its proactive supervision. Firms are reminded to consider their responsibilities under the Duty and ensure they are appropriately prepared and have made any changes needed to governance and controls to incorporate the requirements of the Duty. Attention is drawn to the FCA’s recent Dear CEO letter on implementation of the Duty. The FCA intends to conduct a review in 2024 to assess embeddedness of the Duty, with a focus on Price and Value.
ESG and sustainable investing: With the growing prominence of ESG and sustainable investment products in Asset Managers’ business strategies, the FCA is focused on testing whether firms deliver on the claims made in their communications with investors. Governing bodies should expect scrutiny on their ability to oversee and review management information about product development, ESG and sustainability integration in investment processes, 3rd party and proprietary ESG information providers, and ESG and sustainability claims made by the firm.
The FCA will shortly publish a review of some firms’ ESG oversight practices – asset managers are expected to benchmark their own practices against these findings.
With (in scope) asset managers making their first TCFD aligned disclosure in the first half of 2023, and with the FCA aiming to publish its final decisions on the proposals in CP 22/20 later this year, the FCA will use these new sources of information and applicable rules when considering firms’ conduct in relation to ESG products.
Firms are encourages to outline an assessment of the extent to which net zero commitments have been considered in transition planning.
Product Liquidity Management: Whilst firms have tools available to improve the quality of their liquidity management, the FCA has concerns that firms may not always oversee them, or use them, correctly. The FCA is in the process of completing a liquidity management multi-firm review and will work with identified outliers to improve practices. Firms are expected to consider their own governance, oversight, and controls in reference to the review’s findings.
Investment in Operational Resilience: The FCA has identified that current levels of incident reporting across the sector is variable. Firms are expected to have appropriate measures to understand the operational health of their business, and to be able to respond in a timely manner (as well as ensuring that reporting obligations are met) – including where a third party (intra-group or external) service provider is relied upon. Over the cycle, the FCA intends to proactively monitor and test asset managers’ ability to meet their regulatory requirements.
Financial Resilience: Since its previous letter, the FCA has increased monitoring of asset managers’ prudential health, and has implemented the IFPR for in-scope firms. The FCA will continue to assess firms’ prudential health using internal and external date sources and (where necessary) will conduct targeted monitoring visits. The FCA aims to publish its initial observations on firms’ implementation of IFPR requirements in the first half of 2023, and firms are expected to consider these when reviewing and strengthening their processes.
FCA engagement
The FCA’s focus on positive change means that in addition to this letter covering supervisory strategy, firms can expect to see further engagement and policy discussion with a view to the FCA obtaining input about its Future Regulatory Framework.
For further information, please contact:
Raza Naeem, Partner, Linklaters
raza.naeem@linklaters.com
