The FCA has written an open letter to CEOs of alternative investment firms, setting out its supervisory strategy for those managing and dealing in alternative assets.
In an extract from the letter, its author Nike Trost, the FCA’s head of asset management and pensions policy, issues a stark warning: ”Our portfolio priorities are consistent with the FCA’s 2022 business plan commitments, with integrity of the markets and market abuse, ESG (Environmental, Social and Governance), and consumer needs all priority areas.
”Where they apply, firms should ensure their actions and culture support and promote these initiatives. Our business plan also focuses on promoting competition and positive change, with a priority to strengthen the UK’s position in global wholesale markets and attract new capital.
”Alternative firms have a vital role to play in achieving this. For the UK’s status to be retained its markets must remain clean, liquid, and orderly and there must also be a collective understanding that all participants act with integrity. Those who do not will be held to account.”
Charles Proctor, a regulatory partner at law firm Fladgate, explains what the letter is aiming to achieve.
He said: “The FCA has issued a “Dear CEO” letter to authorised firms that manage alternative investments, either directly or through hedge funds/private equity funds. The letter seems to be a wide-ranging shot across the bows of the firms falling within the FCA’s “Alternatives Portfolio”. It suggests that there are still industry shortcomings in a variety of areas, including:
· Assessment of suitability of investments for both retail and elective professional clients
· Ensuring that clients can only graduate to the elective professional category if they meet both the quantitative and qualitative tests
· The management of conflicts of interest, especially where dominant shareholders have made material decisions in disregard of governance processes
· The requirement for adequate systems to manage funds operating with high leverage and thereby expose investors to greater levels of risk
· The need for systems and controls to mitigate the risks of market abuse
· The risks of inappropriate remuneration policies that create the potential for consumer harm
· The need to ensure that the marketing of ESG investments responds to established benchmarks and is properly documented.
“In short, the letter sets out a number of areas where the FCA may have detected weaknesses in the regulatory management of Alternative Portfolio firms. Authorised firms within this category should expect follow-up from the FCA, and should therefore now be considering a review of their systems and controls in these areas.”
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