FCA Issue Dear CEO Letter to UK Alternative Investment Firms

28 January 2020: The UK Financial Conduct Authority (FCA) has issued a Dear CEO letter to the Chief Executives of firms that offer alternative investments, in a bid to encourage them to consider whether their firm is posing risks to their customers or the markets in which they operate. 

The letter, issued on 20 January 2020, acknowledges that the purpose of the asset management sector is to protect and grow the capital of its customers and to implement effective oversight of any investments. It urges CEOs of firms offering alternative investments to be aware of the risks lying within their company and to take steps to mitigate them. 

The FCA believes progress is still needed in this area, as its investigations so far have found the overall standards of governance to generally fall below its expectations. Asset managers are failing to consider the appropriateness of investment products for their investors, which can cause significant levels of harm. Moreover, the oversight and controls surrounding the Client Assets Sourcebook (CASS) are not always robust. The FCA raises concerns that weak systems and controls such as these can increase the risks of market abuse, financial crime, financial harm and disruption to market integrity.

Within the letter, the FCA highlights 6 supervisory priorities for its alternatives supervision strategy:

• Investor exposure to inappropriate products or levels of investment risk: The FCA acknowledges that alternative investments carry significant levels of investment risk. As such, where firms are offering products and managing investments with exposure to alternative assets, they should consider their appropriateness for target investors. They should look to reduce the chance of consumers having inappropriate exposure to risk by ensuring they have properly identified the client type and their investment need; complied with relevant restrictions; and assessed the appropriateness and suitability of the alternative investment for retail investors. The FCA will be testing to see that firms are aware of who their customers are and that they are focusing on their best interests.
• Client money and custody asset controls: Wherever firms hold or control client money or safeguard custody assets, they must follow the rules set out in CASS. The FCA will be testing whether firms that have such permissions are exercising them under robust control frameworks.
• Market abuse: Systems and controls to tackle market abuse continue to be a focus for the FCA. It recently assessed the adequacy of market abuse controls in the sector and will continue to carry out such exercises in future. Where firms do not comply with their obligations under MAR, the FCA will consider enforcement action.
• Market integrity and disruption: In instances where firms are adopting high-risk investment strategies, the FCA expects to see that they are employing high-quality risk management controls. It may carry out in-depth assessments of firms’ controls in its assessment of this. Firms should be operating robust risk management to avoid excessive risk taking and mitigating any harm or disruption to the financial markets.
• Anti-money laundering and anti-bribery and corruption: All authorised firms should be aware of – and have in place systems and controls to mitigate – the risk of financial crime. The FCA is placing particular importance on due diligence of third parties and Know Your Client (KYC) checks. It will be reviewing the systems and controls of firms to ensure they are mitigating their risks – especially with regard to money laundering and terrorist financing. 
• EU withdrawal: The UK will leave the EU on 31 January 2020, with an implementation period due to come into force until 31 December 2020. The FCA expects firms to consider how this implementation period will affect its business. Its customers, and what action may need to be taken to be ready for 1 January 2021.