Dear CEO letter provides insight into regulatory agenda for fund managers
FCA have issued a Dear CEO letter to firms in its Asset Management and Alternatives Portfolio (i.e. full scope AIFMs) which provides key insight into the regulator’s areas of focus for 2024. The letter updates previous portfolio letters issued in August 2022 and February 2023 and comes at a time of increased supervisory communication and intervention with an emphasis on ensuring firms engage with regulatory change. So fund managers are strongly encouraged to take note.
In the letter, FCA note that it expects to make “significant progress” towards implementing the government’s Smarter Regulatory Framework (SRF) with a focus on MiFID, AIFMD and UCITS. This will be enacted through changes to the Handbook (which will include significant parts of Regulation being ‘lifted and dropped’ into it, as well as more nuanced changes and improvements) however the timing of such changes are yet to be determined.
The more immediate priority for fund managers then will be to ensure they are confident in their arrangements for the areas FCA seek to review during 2024. We have highlighted some of the key areas that may require firms to take action below:
Good governance and risk management: Throughout the letter, FCA references a continued focus on assessing the effectiveness of firms’ governance arrangements, the apportionment of responsibility for risks and risk management as well as ensuring good management information to support decision making. Senior management are expected to be engaged with the risks FCA identifies and take action where necessary. An immediate action to help demonstrate this is to ensure that firms’ Boards discuss the content of this letter (and document that discussion) and where necessary, take action.
Valuation of private assets: As ComplyCraft noted at the end of last year, a review of fund managers’ valuation practices is on the horizon. In this Dear CEO letter, FCA confirm it is planning a multi-firm review examining valuation practices for private assets, with a particular focus on individual accountability and governance arrangements. If you are unsure on whether your arrangements will likely meet FCA expectations and would like to discuss, please contact us.
Assessment of Value (AoV) and Consumer Duty: FCA reference last year's multi-firm review of AFMs' AoVs and how it has observed improved practices. However, customer outcomes from these assessments remain variable. Clearly FCA want the AoV (or price and value assessment) to avoid being a tick-box exercise which rubberstamps the status-quo but instead want to see genuine assessments which have a measurable and demonstrable impact on customer outcomes. During 2024, FCA will be carrying out a joint multi-firm review with the life insurance portfolio to look at the price and value delivered to unit-linked funds. Even if this doesn’t capture your firm, we recommend all firms review their value assessment processes and consider any published guidance that follows (particularly as other multi-firm reviews are always a possibility).
Change management: FCA acknowledge the considerable amount of current and planned regulatory change impacting the sector and the challenges this brings, particularly in the current market where many firms are struggling to attract/maintain AuM. In light of this, FCA are concerned firms may not be adequately resourced to handle change in addition to any of the firm’s strategic developments (e.g. mergers/acquisitions). In response, FCA say it will be engaging with firms to assess their governance and resourcing of change programmes, particularly regarding the implementation of SDR and PS21/3. So now is the time to make an honest assessment of the firm’s resources and ability to implement regulatory change effectively, and take action where required.
Financial crime: FCA re-iterate its expectation that firms have adequate systems and controls in place to counter the risk that they might be used to further financial crime. This includes compliance with the UK sanctions regime.
You can read the letter in full here. If you have any questions or need assistance in any of the areas highlighted, please get in touch.