On 26 February 2025, the Financial Conduct Authority (FCA) published a portfolio letter setting out its supervisory strategy for the asset management and alternatives sector.

Background

The letter explains the importance of the UK asset management sector for the Government’s growth objectives and highlights that the way in which asset managers and alternatives firms manage their responses to geopolitical and market events will continue to be crucial. It also flags the importance of robust operational resilience to the smooth functioning of markets given the increasing interconnectedness of the sector and reliance on third parties.

Outside its supervisory work, the FCA explains that it will undertake work to strengthen and streamline its regulatory and data frameworks to support investment in areas such as private assets and digital innovation, including tokenisation. It plans to engage with firms to discuss initiatives to unlock capital investment and liquidity, accelerate digital innovation to improve productivity, and take forward ideas to reduce the regulatory burden.

Supervisory approach

The FCA notes that it will continue its focus on how effectively firms’ governance arrangements are assigning senior accountability for the risks identified in its priority areas, oversight by governance bodies and ensuring appropriate management information about those risks supports good decision making. It also flags that it is continuing to improve how it uses data and technology and considering how this can help reduce regulatory burden, as well as reviewing its data collection to make it more efficient and effective. The FCA also plans to engage with industry during 2025 on a review of the Alternative Investment Fund Managers Directive, with the aim of streamlining regulatory requirements and collecting data that is proportionate to its supervisory needs and cost-effective for firms.

Supervisory priorities

The letter sets out the following current supervisory priorities for the FCA in this sector:

  • Private markets: The FCA has carried out supervisory work to support confident investing in private assets and plans ‘shortly’ to release its multi-firm review on Private Market Valuation Practices, the findings of which firms should consider to ensure their valuation processes are robust with a strong governance framework and audit trail. It also flags that it will start a multi-firm review in 2025 focusing on conflicts of interest at firms managing private assets, which will assess how firms oversee application of their conflict-of-interest framework through governance bodies and reviews by the three lines of defence.
  • Market integrity and disruption: Informed by vulnerabilities identified in the Bank of England’s System Wide Exploratory Scenario, the FCA plans to focus surveillance on prudent risk management, liquidity management and operational resilience, and to continue to improve its supervisory processes to strengthen oversight of these market vulnerabilities. It also intends to continue to monitor liquidity risk and ensure that the recommendations in the International Organization of Securities Commissions’ consultation paper on liquidity management for collective investment schemes are in place across its systems, and to consider recent findings on margin preparedness.
  • Consumer outcomes: The FCA plans to start a multi-firm review of model portfolio services (MPS) in 2025 to look at how firms are applying the Consumer Duty, as well as publishing the findings from its ongoing multi-firm review of unit-linked funds later in the year. It notes that it will also engage with firms affected by key policy proposals to make its disclosure regime more flexible, to support smooth implementation of these proposals.
  • Targeted work – sustainable finance: The FCA flags that it will engage with firms with sustainability-related products, to understand how they are implementing the labelling, naming, and marketing rules, so that it can identify any outliers and engage with them.
  • Targeted work – financial crime and market abuse: Where it identifies weaknesses, the FCA plans to review the effectiveness of firms’ financial crime systems and controls, with a supervisory focus on anti-money laundering controls in private markets funds.

While the FCA acknowledges that not all the issues raised in the letter will be relevant to all firms in the sector, it asks firms to discuss the letter with its Board, Executive Committee, and accountable Senior Managers to consider whether the risks of harm discussed here exist in their firm and implement strategies for managing them.