In March 2024, the Financial Conduct Authority (FCA) published two documents setting out an updated supervisory approach to the asset management and alternatives sector. These are the FCA's 2024/25 Business Plan (Business Plan) and a “Dear CEO Letter'' titled “Dear Chief Executive Officer of the Company''. Asset Management and Alternatives Oversight Strategy – Interim Update” (Letter to the CEO).
The business plan details the regulatory agenda and strategic priorities for the coming year, and the Dear CEO letter serves as a parallel resource to inform stakeholders of the FCA's regulatory expectations and near- to medium-term focus. To do. A particular focus of both publications is the FCA's emphasis on accountability when assessing the effectiveness of a company's governance. This ensures that a company's board and senior management comply with FCA requirements and reduces the risk of potential harm.
Here we analyze the two documents and highlight areas that asset managers and alternative sector personnel may want to monitor.
business plan
The FCA reaffirms its commitment to maintaining its operational objectives in its business plan.
(i) Protect consumers.
(ii) ensuring the integrity of the UK financial system;
(iii) promote effective competition;and
(iv) strengthen the international competitiveness of the UK economy;
In response to the changing external environment, the FCA has identified and is currently monitoring three key challenges: rising interest rates and persistent inflation; global financial risks (including riskier market-based corporate borrowing and high levels of public debt); and geopolitical risks that could cause significant disruption. The FCA will provide a further update on how it measures performance against the index in the summer.
To help meet these external challenges in the coming year, the FCA will reduce and prevent financial crime, prioritize consumer needs and strengthen the UK's position in global wholesale markets as part of its latest focus. We will make three specific promises:
In addition to our ongoing activities, the FCA will be launching new activities to support our new focus, including:
- Increase investment in the FCA's systems to use intelligence and data more effectively when targeting high-risk companies and activities.
- Conducting multi-company initiatives and market research across a range of sectors to raise standards of consumer protection, with a particular focus on supporting vulnerable groups.and
- Encourage innovation and support industry efforts towards T+1 payments to improve operational efficiency.
Letter to CEO
The Dear CEO letter serves as an interim update following a series of communications published in August 2022 and February 2023 that outlined, in a phased manner, the FCA's supervisory strategy for asset management firms primarily engaged in the administration or advice of alternative investment products. The Dear CEO letter was issued in light of the changing external market environment, in particular the heightened uncertainty and several market shocks experienced over the past year. The letter outlines the FCA's supervisory priorities and notes that the FCA expects “a significant amount of significant business and regulatory changes to be implemented in 2024.”
The table below outlines some key areas that private capital business investment managers need to closely monitor.
| Explanation of areas of the FCA’s supervisory strategy | |
|---|---|
| Sustainability disclosure compliance | |
| The FCA will oversee the enforcement of sustainability disclosure requirements (SDRs) and investment labeling, particularly to prevent companies from making exaggerated or misleading claims in relation to sustainability. | For more information on how to achieve SDR compliance, please see the January 2024 Client Alert. It includes a comprehensive overview of SDR rules covering anti-greenwashing, product labeling, naming, marketing, and disclosure, each set of which will be applicable going forward. Effective from various dates after May 31, 2024. |
| Valuation of private assets | |
| The FCA plans to carry out another review of several companies to scrutinize private asset valuation practices, focusing on individual accountability and the governance role of boards and valuation committees. . | The initiative follows the FCA's review of liquidity management across companies in July 2023, which revealed significant disparities in the quality of compliance. Given the current high interest rates and credit crunch, the FCA is expected to increase its oversight of personal asset valuations. |
| Risk monitoring and “outlier” company | |
| The FCA will closely monitor companies that pose unique risks to the financial system or are considered outliers. This specifically targets money market funds, funds with significant liquidity mismatches, and the transmission of risk from the non-bank financial sector to the broader market. Additional areas of focus include companies with large, concentrated market positions and companies operating with high levels of leverage. | This strategy is in line with the FCA's updated supervisory approach, published in March 2024 as a supplement to its Business Plan. In this updated approach, the FCA has further clarified its focus on proactively preventing inappropriate conduct and identifying new risks with the aim of mitigating or preventing risks. |
| Innovation and fund tokenization | |
| The FCA continues to support innovation in the UK asset management industry, including exploring fund tokenization use cases and other potential innovative technologies to promote a secure, sustainable and efficient financial ecosystem. To go. | In our December 2023 Client Alert, we analyzed the preliminary approval for the implementation of fund tokenization in the UK. Although the recent letter to CEOs did not provide any new regulatory updates on the subject, the FCA reaffirmed its commitment to supporting fund tokenization and encouraged other regulators and international standard setters to We plan to work with them to promote the unification of global standards. |
| Regulatory system reform | |
| Following the feedback received, the FCA has focused on revising the Markets in Financial Instruments Directive (MiFID), the Alternative Investment Fund Managers Directive (AIFMD) and collective investment undertakings in negotiable securities (UCITS), as well as the Treasury's smarter Continue to implement the regulatory framework. In February 2023 Discussion Paper 'Updating and Improving the UK's Asset Management Regime' (DP 23/2). His three main priorities for this reform are to make the regulatory regime more appropriate for alternative fund managers, update the regulatory regime for retail funds, and increase support for innovation. | For more information on the proposed structural adjustments and potential areas of improvement to the MiFID, AIFMD and UCITS regimes as outlined in DP 23/2, please see our March 2023 Client Alert. Although the extent to which the FCA will integrate the proposed changes outlined in DP 23/2 remains unclear, the FCA has made significant progress this year by “upgrading and repealing” key parts of existing regulations. It sends a clear message that it expects you to succeed. . |
Other focus areas
- The FCA remains committed to redressing deficiencies in authorized fund managers' 'valuation' governance, strengthening the enforcement of consumer obligations and mitigating operational disruptions that may adversely impact consumers. There is.
- The FCA will continue to work with the Bank of England on a system-wide exploratory scenario launched in June 2023. The scenario aims to improve regulators' understanding of the behavior of banks and non-bank financial institutions during times of heightened stress in financial markets. .
- The FCA plans to introduce an upgraded funds gateway to facilitate new offshore funds from comparable jurisdictions to be marketed in the UK, which is part of the temporary marketing permission regime established post-Brexit. It will replace.
- The FCA continues to be actively involved in providing thought leadership to organizations such as the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board (FSB), and the FCA continues to be actively involved in providing thought leadership to organizations such as the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board (FSB), and continues to support the UK We are striving to maintain our global competitiveness.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended to be, and should not be construed as, legal advice. there is no. This Memorandum is considered advertising under applicable state law.
