FCA Review of Conflicts of Interest in Private Markets: Key Findings and Regulatory Expectations

Key Findings

Governance and Oversight

• Business Models and Ownership Structures: More complex firms generally face greater conflict risks and require stronger governance, escalation and oversight. The FCA also found that some UK activities were characterized as advisory because formal decisions were taken overseas, despite UK-based staff being frequently involved in significant parts of the investment life cycle. Conflicts arrangements should reflect the substance and complexity of activities undertaken in the UK.
• Identifying Conflicts Promptly: Stronger firms embedded conflict identification throughout the investment life cycle, supported by clear responsibilities, training, escalation routes, monitoring and appropriate systems. Weaker firms relied more heavily on individual judgment and informal processes.
• Internal Conflicts Documentation: Stronger firms maintained comprehensive conflicts inventories, policies and procedures, supported by clear responsibilities and escalation triggers. Good practice also included detailed audit trails, governance records, systems supporting conflict checks and tailored staff training.
• Oversight of Conflicts: Stronger firms maintained clearly defined governance structures and committees responsible for reviewing material conflicts. Where Compliance operated conflict controls, stronger firms separated this activity from independent second-line assurance. The FCA cautioned that consultation by limited partner advisory committees (LPAC) should support, rather than replace, effective internal governance and should not be relied on as the primary mechanism for managing material conflicts, particularly because LPACs may not represent all investors equally.

Personal Conflicts

• Personal Account Dealing and Other Personal Investments: All firms maintained personal account dealing controls that required approval before trading, and most conducted ongoing monitoring. Personal investments may create conflicts where employees are involved in investment decisions or have access to non-public information.
• Gifts and Entertainment: Although all firms had policies and approval thresholds, their effectiveness varied. The FCA observed that some hospitality, including air travel and high-value sporting events, exceeded what it typically sees in public markets and expects firms to be able to explain the rationale for such gifts and entertainment. Stronger firms maintained detailed records, applied enhanced scrutiny to sporting and high-value hospitality events, and monitored repeated hospitality or gifts involving the same provider, recipient or business relationship. Some firms were less able to provide evidence on how conflicts relating to gifts and hospitality provided by or to third parties had been assessed and managed.

Conflicts Across the Investment Life Cycle

• Origination and Deal Sourcing: Stronger firms identified conflicts early through transaction screening and timely involvement of legal and compliance teams, including before nondisclosure agreements were signed. They embedded conflicts management within formal decision-making and escalation processes.
• Information Controls: Stronger firms used physical, organizational and system-based information barriers, surveillance and access controls. Weaker firms relied more heavily on training, informal separation and individual judgment, with limited monitoring of whether confidential information was effectively contained.
• Allocation: Stronger firms maintained documented allocation methodologies and governance oversight. They considered investment strategy, mandate suitability, portfolio construction and investor objectives, and they recorded the reasons for exceptions.
• Connected and Multi-Party Transactions: These transactions may create heightened conflicts where the interests of funds, investors or affiliated parties differ. Stronger firms applied enhanced governance, conflict-clearance processes, additional oversight and, where appropriate, independent valuations or separate decision-making arrangements.
• Cross-Fund Transactions and Continuation Vehicles: These transactions create particular risks because firms may effectively sit on both sides. Stronger firms separated buy-side and sell-side decision-making, applied independent challenge and robust valuation practices, and documented how competing investor interests were balanced. A third-party valuation alone may not adequately manage the conflict where decision-making responsibilities overlap.
• Investor Alignment: Stronger firms aligned manager and investor interests through meaningful general partner commitments, governance controls, and oversight of fees, expenses, fundraising, capital-deployment pressures and other commercial incentives.
• Investor Fairness, Most-Favoured-Nation (MFN) and Side Letters: Stronger firms treated MFN provisions and side letters as part of their wider conflicts and investor-fairness frameworks, supported by legal and compliance teams’ oversight and consideration of the cumulative effect of preferential rights.
• Disclosures: Disclosure should supplement, not replace, effective conflicts management. Stronger firms made clear and timely disclosures and engaged investors early enough to allow meaningful challenge.
• Ongoing Management: Firms should identify and reassess conflicts throughout the investment life cycle, demonstrate how investor fairness was considered, and adapt their governance and controls as their businesses and transactions become more complex.

How Kroll Can Support You

Kroll can provide independent support to firms by:

• Performing gap analysis assessments of existing conflicts arrangements against the FCA’s findings
• Advising on the design, development and implementation of robust control frameworks for conflict identification, monitoring and management
• Performing independent control testing and assurance reviews of existing conflicts arrangements
• Providing tailored training to staff and senior management relevant to their respective functions and responsibilities