FCA has published its supervisory strategy letter for “alternatives” – that is firms that are predominantly active in the alternative investment sector. Although the letter, as usual, is addressed to the CEO, FCA recognises that this particular portfolio comprises a large and diverse group of firms such that not all issues it raises will be relevant, and so the letter contains a recommendation that the Board consider it and decide which areas the firm and its assurance function should focus on.
On the whole, most alternatives firms mainly deal with professional investors and counterparties who are able to manage their own interests, but many firms do also deal with retail and elective professional investors.
With that in mind, FCA has identified as its supervisory priorities:
- putting consumers’ needs first: while FCA rules go some way to preventing unsophisticated investors from investing in high-risk products, firms should also have in place measures to ensure appropriate assessments are carried out before alternative investments are offered to retail investors. FCA also calls on firms to ensure that their elective professional investors meet the required COBS tests. It also notes the obligations the new Consumer Duty will place on firms and says it will shortly be issuing a questionnaire to alternatives firms asking for information about their business models, products, investor categorisations and the associated control framework. Firms will need to explain to FCA what reasonable steps they take to ensure their target market is appropriately defined and not exposed to unsuitable levels of risk;
- conflict management: FCA has seen instances where firms have bypassed their own procedures to make sales or increase AUM, and has also noted where internal firm conflicts have caused indirect harm to clients;
- market integrity and disruption: FCA is determined to strengthen the UK’s position in global wholesale markets and has seen that firms with concentrated or leveraged investment strategies can negatively impact liquidity during adverse market conditions and this can lead to wider market instability and contagion risks. It will therefore be continuing to focus on firms’ controls and liquidity assessments;
- market abuse: FCA has previously noted failings in firms’ controls and will continue to supervise this and take appropriate action where firms’ UK MAR controls are not tailored to their business;
- culture: FCA is particularly concerned about the impact of remuneration packages on staff incentives and will be looking at how senior management and firm policies influence an organisation’s culture, including the ability of staff to “speak up”. It will also be looking at D&I, on which it proposes to consult further later this year;
- ESG: FCA has seen growth in authorised funds with a stated intent of investing using sustainable investment goals, and a gradual increase also in AIFs using this strategy. It notes that firms’ product documentation must be clear, not misleading and that firms’ actions match the claims they make. It expects in-scope firms to be complying with its climate-related disclosure requirements which must be made from 2023.