On 24 April 2023, the FCA published a multi-firm review entitled Further guidance on enhancing resilience in liability driven investment.

The purpose of the publication is to share FCA guidance and recommendations for liability driven investment (LDI) managers. The observations in the publication apply principally to FCA-authorised firms providing services in relation to LDI strategies. This includes the management of mandates from pension schemes and pooled or single-client LDI funds, and encompasses firms appointed by a non-UK Alternative Investment Fund Manager. In addition, the vulnerabilities which existed in LDI may arise in other firms and sectors and the FCA therefore expects firms which may face similar types of risk to also consider the recommendations that have been set out.

The recommendations set out in the publication are based on the FCA’s oversight of markets and firms during and after September 2022’s volatility. They also reflect intelligence from other market participants and other regulatory authorities in the UK and internationally.

The FCA’s observations and recommendations cover:

• Risk management and stress testing recommendations.
• Operational arrangements, communications and clients recommendations.

The FCA adds that special consideration should be given to operational arrangements (including any third-parties that are critical to the product or service); liquidity risks; the profile and capability of the investor; the practical access to additional liquidity required in different conditions, including those that are more severe than previous events (i.e. stress testing); and other systemic factors that may heighten risk or constrain responses.

Where they have not already done so, the FCA expects LDI managers to complete and embed as a matter of urgency all necessary improvements to their operating practices to address the deficiencies identified. The FCA will be working with firms to assess their progress in addressing vulnerabilities. In collaboration with other authorities, the FCA is also engaging with the sector on its implementation of and compliance with guidance or requirements issued by other authorities, including the Financial Policy Committee publication in March 2023 and the Pension Regulator’s guidance issued in April 2023.

The FCA also reminds firms that as part of their responsibilities under Principle 11, they are expected to notify the FCA promptly of developments in their operations or the markets which may pose a risk of harm to consumers or to market function. SUP 15.3 sets out additional rules and guidance on when the FCA would expect notice of matters relating to a firm. The FCA expects other market participants, including asset managers, to consider their own practices and to take appropriate lessons from the relevant observations in this publication.