On 26 February 2025, the Financial Conduct Authority (“FCA”) published a portfolio letter (the “Letter”), outlining its supervisory priorities for the asset management and alternatives portfolio for the upcoming year. Additionally, last week, the FCA published the findings of its multi-firm review of valuation processes (the “Review”). This article summarises the key aspects of the Letter and the Review.
Governance and Culture
The FCA reminds firms that it views “good governance and a healthy firm culture” as critical to the achievement of good outcomes for the firm, its clients and the overarching market. In supervising firms’ controls of the risks identified via the regulator’s supervisory priorities (these are broadly: investor harm in private markets; operational resilience and risk management; and retail consumer harm), the FCA will scrutinize the effectiveness of firms’ governance arrangements – to ensure that:
- appropriate senior accountability is assigned for the control of these risks;
- there is sufficient oversight by the relevant governance bodies; and
- linked to the above, appropriate management information regarding these risks is shared with senior management and the governance bodies to support their decision-making.
The FCA recently made similar comments around the importance of building and maintaining a healthy firm culture in a speech delivered by Emily Shepperd, the Chief Operating Officer of the FCA – for a summary of the key points made, along with practical actions which we consider firms can implement internally, please refer to our article here.
The FCA’s Three Supervisory Priorities for the Sector
1. Supporting confident investing in private markets
As private market trading requires firms to estimate private asset values using judgment-based approaches (as opposed to more liquid public markets, where there is more frequent trading and price discovery), there is a risk that firms may value private assets inappropriately – for example, as a result of poorly managed conflicts of interest and/or insufficient expertise.
Fair and proper valuation of private assets is essential to ensure that investors: (i) understand the performance of their investments, and (ii) are not improperly charged. In this context, the Review identified (at a high level) the following areas requiring firm attention for improvement:
- Governance. In yet another reminder of the importance of documentary evidence, the FCA found that some firms’ valuation committees failed to record how valuation decisions were reached in their meeting minutes, leading the FCA to doubt whether: (i) there was sufficient and effective oversight of these valuation decisions; and (ii) that the requisite details were being provided to other important stakeholders, such as auditors and investors’ due diligence committees;
- Conflicts of interest. While all firms had identified conflicts in their valuation processes around fees and remuneration, certain conflicts were found to be “only partially identified and documented” – including valuation-related conflicts related to investor marketing, secured borrowing, asset transfers, redemptions and subscriptions and uplifts and volatility;
- Independence of valuation processes. Although some firms “very clearly” demonstrated functional independence in their valuation processes, many firms had valuation functions that appeared only to “perform an administrative and operational role” – collecting data and applying valuation models, but with limited control or ability to challenge inputs or assumptions of the investment professionals. The FCA considers that such valuation structures require greater oversight by a valuation and/or risk committee to ensure the management of conflicts, that the model, input and assumption changes are appropriate, and that sufficient independence is maintained. The regulator will be following up with firms that permit senior investment professionals to act as voting members of valuation committees, to challenge whether this practice aligns with the need for appropriate independence and conflict management; and
- Defined processes for ad hoc valuations. The FCA found that many firms lacked defined processes or a consistent approach for making ad hoc valuations (defined by the FCA as valuations made outside the regular valuation schedule) to revalue assets during market or asset-specific events. The regulator has encouraged such firms to build a defined process, including the thresholds and types of events that would trigger ad hoc valuations.
Firms should review the FCA’s findings and evaluate their current valuation processes against the regulator’s expectations – to ensure that they operate private market valuation practices that are robust and supported by strong governance frameworks and audit trails.
The regulator has also confirmed that it is taking the following steps:
- It is contributing to IOSCO’s review of its 2013 Principles for the Valuation of Collective Investment Schemes; and
- It will conduct a multi-firm review on how firms managing private assets oversee the application of their conflict of interest framework through governance bodies and reviews by the three lines of defence.
2. Building firm and financial system resilience against market disruption
This supervisory priority comprises two areas of focus for the FCA, resulting from the findings of the System Wide Exploratory Scenario (“SWES”): operational resilience and liquidity management.
- Operational resilience. The FCA notes that the financial markets continue to be volatile as a result of the current geopolitical climate, including the increasing frequency in disruptive market events. The regulator considers that the way in which firms manage their responses to such events continues to be “crucial” – particularly given the “increasing interconnectedness of the sector and reliance on third parties”. Firms are therefore reminded of the importance of maintaining robust operational resilience (including the oversight of third parties to which they outsource services) and risk management practices in the face of such volatility.
The FCA also encourages firms to consider the SWES report’s findings on system-wide dynamics for stress testing and contingency planning, to ensure robust risk management practices.
- Liquidity management. The FCA continues to monitor liquidity risk and will, in particular, consider the findings of several reports on the issue, namely: the SWES report; the IOSCO’s consultation paper on liquidity management for collective investment schemes, as well as the Financial Stability Board’s report on liquidity preparedness for margin and collateral calls.
3. Securing positive outcomes for consumers
The FCA recognises the efforts firms have made to implement and uphold the Consumer Duty in their business practices, particularly as the sector has seen innovative developments to provide retail products and services like MPS and ETFs to retail consumers. The regulator has reiterated its expectations that firms should continue to develop their monitoring capabilities, to ensure they are delivering good consumer outcomes.
In terms of forthcoming actions, the FCA has confirmed that:
- It will publish its findings (including good practices) of its multi-firm review of the assessment of price and value of unit-linked funds later this year;
- It will launch a new multi-firm review of MPS, to determine how firms are applying the Consumer Duty to these products in order to ensure that consumers are receiving good outcomes; and
- It will engage with firms to ensure a smooth implementation of its disclosure proposals – including the Advice-Guidance Boundary Review and Consumer Composite Investments consultation.
Two Additional Areas for Targeted Work
In addition to the above supervisory priorities, the FCA also highlights two areas for targeted work over the coming year:
1. Sustainable Finance: The FCA, through its anti-greenwashing rules in its Sustainability Disclosure Requirements and Investment Labels regime, seeks to ensure that firms can substantiate the claims they make regarding their sustainable products. To achieve this, the FCA will engage with firms offering such products to understand how they are implementing the relevant rules.
2. Financial Crime and Market Abuse: As investment in private assets increases, so does the risk of financial crime – therefore firms must be prepared to identify ultimate beneficial owners by employing proportionate, risk-based due diligence and robust KYC checks. The FCA will take an interest in the effectiveness of such financial crime systems and controls in the private market fund context.
Our team would be happy to address any questions you may have on this subject.
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