FCA's latest “Dear CEO” letter on asset management priorities

05 March 2025

The FCA has issued its latest Dear CEO letter to the asset management and alternatives sector flagging its supervisory priorities. 

Private markets focus

Top of the FCA’s priority list is to address the risk of investor harm in private markets. The FCA’s concerns relate to the risks of reliance on valuations and poorly managed conflicts of interest. While this focus may seem surprising given the pressure on the FCA to reduce regulatory burdens and raise risk appetites in support of the government’s growth strategy, it does align with the FCA’s recent work on governance, valuations and conflicts of interest in private markets. 

The FCA explains its concerns that firms may be valuing private assets inappropriately through poorly managed conflicts of interest or insufficient expertise. The FCA warns that this means that where transactions and fees are calculated by reference to valuations, there is an increased risk of investor harm. The FCA refers to its recent review, “Private Market Valuation Practices Review” (Valuation Practices Review) where the FCA found that firms’ valuations processes were lacking when it came to identifying and documenting potential conflicts of interest and providing for independence. The FCA urges firms to act on the FCA’s latest findings. See our article here for further information on the steps firms ought to take following the FCA's Valuation Practices Review.

The FCA has also announced it will start a multi-firm review focusing on conflicts of interest at firms managing private assets. The FCA is particularly concerned where firms operate multiple intersecting business lines, continuation funds, co-investment opportunities or partner with other financial institutions. The FCA will assess how firms oversee the application of their conflict-of-interest framework through governance bodies and reviews by the three lines of defence, to ensure investor outcomes are not compromised.

Finally, and unsurprisingly, the FCA is keen to reiterate its commitment to its secondary growth objective. It confirms its commitment to reviewing the UK implementation of the Alternative Investment Fund Managers Directive this year with the stated aim of streamlining both regulatory requirements and the collection of data so that it is both proportionate to the FCA’s supervisory needs and is cost-effective for firms. The findings of the Valuation Practices Review will also be incorporated into this review process. 

Market disruption

The FCA is focusing on firms’ resilience to market disruptions following events including the Liability Driven Investments crisis and the CrowdStrike outage. The FCA is concerned that firms’ operational frictions can limit their abilities to respond to market disruptions. The FCA expects firms to consider their resilience and the effectiveness of their operational processes and collateral management. In particular, the FCA urges firms to learn from its joint Bank of England report on System Wide Exploratory Scenario (SWES Report). 

On its supervisory approach, the FCA has also confirmed that it will continue its data-led approach to identifying outlier firms and funds to seek assurances about risk management. It will focus particularly on firms with high leverage, illiquidity, or concentrated investment strategies.

Consumer outcomes

As expected, following implementation of the Consumer Duty, the FCA continues to prioritise consumer outcomes. Aside from the private markets focus, the other significant development in the FCA’s letter is its announcement that it will start a multi-firm review of model portfolio services this year to assess how firms are applying the Consumer Duty to these services.

In focusing on consumer outcomes, the FCA has also confirmed that it will publish the findings of its multi-firm review of unit-linked funds and engage with firms on its policy proposals in relation to its disclosure regime. 

Other targeted work

Sustainable finance and financial crime are also highlighted as additional areas of supervisory focus. The FCA says it will engage with firms with sustainability-related products to understand how they are implementing the labelling, naming, and marketing rules.

On financial crime systems and controls, the FCA expects firms to be alert to their risks of being used to facilitate financial crime including fraud, money laundering, terrorist financing, market abuse and bribery and corruption. 

Key actions for firms

Given the number of firms that the FCA regulates, these letters are used as a key tool of FCA supervision. Firms should carefully consider the risks that the FCA has highlighted which are applicable to them and what steps they should take now to manage and mitigate them. Firms should consider in particular: 

  • reviewing their governance framework to ensure effective oversight of their valuation process;
  • assessing their valuation procedures and benchmarking these against the good practice described in the Valuation Practices Review; 
  • reviewing their conflicts procedures including taking a fresh look at any conflicts of interest in their business model and ensuring engagement by staff at all levels including front office; 
  • reviewing the SWES Report to identify and address any gaps in their risk management, liquidity management and operational resilience procedures; 
  • reviewing their operational resilience processes and third party oversight; 
  • where applicable, the ongoing application of the Consumer Duty to all their services ensuring that their processes for achieving good consumer outcomes continue to evolve and mature; and
  • refreshing their financial crime and market abuse related risk assessments and procedures in light of the increased level of investment in private assets and any changes in business services or a firm’s investor base.