Mon, Sep 5, 2022
On 9 August 2022, the FCA issued a “Dear CEO” letter to firms within the “Alternatives” portfolio setting out its Alternatives Supervision Strategy for 2022. The letter outlines the FCA’s views on the main risks of harm that alternative investment firms, and the markets in which they operate, pose to their customers. The FCA is asking firms’ boards to consider which risks are applicable to their business and whether they have the appropriate strategies in place to address them and meet regulatory requirements.
The FCA urges firms to consider the appropriateness or suitability of the investments they offer to their target customers, particularly retail and elective professional clients, and to review their onboarding processes and client categorization processes to ensure they are effective. Firms must also consider the newly published rules for the marketing of high-risk investments and the new obligations under the Consumer Duty. The FCA is planning to issue a questionnaire in the coming months to collect information about firms’ business model, products, investor categorization and associated control framework. The FCA will then follow up with any firm “exhibiting characteristics that increase the potential of consumer harm.”
In recent years, the FCA has observed a variety of conflicts of interest, including internal firm conflicts and firms seeking to bypass their own processes to make sales or increase their assets under management (AUM), all of which can cause harm to investors. Firms are reminded of recent fines levied as a result of inadequate management of conflicts (for example, see the Decision Notice and the Final Notice recently published by the FCA concerning two alternative investment firms). The FCA also calls on firms’ boards to review their procedures to ensure conflicts are avoided, managed or disclosed in a way that minimizes harm to investors and markets.
Firms are reminded to implement strong prevention cultures and effective systems and controls to ensure compliance with the UK’s Market Abuse Regulation. Should they fail to do so, the FCA may proceed with criminal, civil or supervisory actions. The FCA is also concerned about market disruption which can be caused by firms with highly leveraged or concentrated investment strategies which can negatively impact liquidity during stressed market conditions. Firms employing such strategies should review their risk management systems, controls and resources to ensure that these are fit for purpose. Firms' boards must ensure that risk functions are appropriately resourced and proportionate to the levels of portfolio and business risk.
A firm’s corporate culture has a direct influence on its business culture. The FCA plans to look at how senior managers and firms’ policies influence organizational culture. Evidence of staff being unable to speak up about poor and damaging behavior, together with senior individuals within a firm who occupy dominant roles, is an area of particular concern to the FCA. Diversity and inclusion are also important factors contributing to a firm’s culture. Boards are expected to consider diversity and inclusion as part of fostering a healthy culture. Last year, the FCA published a Discussion Paper setting out potential policy interventions in this area and plans to publish a Consultation Paper later this year.
With regards ro ESG the FCA's strategy will focus on the following matters:
We encourage firms to:
Our team of compliance and regulatory experts are on hand to assist and support you with any of the matters raised in the FCA’s “Dear CEO” letter and any of the actions mentioned above.
Please reach out to your usual contact at Kroll, or one of the contacts listed below, if you would like to discuss further.
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