In February 2025, Camille Blackburn, director at the Financial Conduct Authority (FCA), set out the FCA’s current supervisory priorities for the asset management and alternatives sector (Sector) in a “Dear CEO” letter (Letter). These are summarized below.
Private Markets
Valuations
The FCA will shortly be releasing the multi-firm review report on Private Market Valuation Practices which was announced in March 2024. The FCA began the review to address concerns regarding the valuation practices for private assets, particularly when compared to more liquid public markets, and the consequences of poor valuation practices, such as the potential for elevated management fees based on incorrectly high valuations. The review included meetings and audits of a number of private market firms during 2024 and the report will set out the FCA’s conclusions from that process.
Conflicts of Interest
Following on from the review of Private Market Valuation Practices, this year the FCA will be starting a multi-firm review focused on conflicts of interest at firms managing private assets. The concern is that poorly managed conflicts of interest increase the risk of investor harm. The Letter notes that the risk of conflicts is particularly common in the following scenarios: continuation funds, co-investment opportunities, firms operating multiple intersecting business lines or firms partnering with other financial institutions.
Retail Investors
The FCA notes the need for the Sector to understand any retail distribution chains in order to comply with the Consumer Duty when seeking to expand the number of private market products being offered to retail investors.
UK AIFMD
The FCA plans to engage with the Sector on a review of the UK’s Alternative Investment Fund Managers Regulations (UK AIFMD) to streamline regulatory requirements and ensure that the data collected by the FCA is proportionate to supervisory needs and cost-effective for the Sector.
Market Integrity and Disruption
The FCA intends to focus surveillance efforts on management of risk, liquidity and operational resilience, informed by the findings of the Bank of England’s System Wide Exploratory Scenario, an exercise which considered how the UK’s financial system would respond to a market shock, including non-bank financial institutions such as private funds. Firms with strategies that require high leverage, illiquid assets and concentrated investment strategies should expect particular scrutiny. In addition, the FCA suggests that firms should look at the resilience of their operational processes and collateral management, including their oversight arrangements with outsourced third parties.
Consumer Outcomes
In addition to new rules expected to be introduced by the FCA based on both its Advice-Guidance Boundary review and Consumer Composite Investment consultation papers, the Letter highlights the following FCA multi-firm reviews focused on consumer outcomes.
Unit-Linked Funds
The FCA plans to publish the findings of its multi-firm review of unit-linked funds, focused on ensuring that good outcomes are being delivered for investors by assessing the price and value of such products.
Model Portfolio Services (MPS)
Noting that MPS are growing in popularity, that they generally invest in investment funds and that asset managers are involved in constructing and distributing MPS, the FCA will start a multi-firm review of how MPS are applying the Consumer Duty.
Sustainable Finance
Following on from the introduction of the FCA’s Sustainability Disclosure Requirements in 2024, which seek to build trust in the sustainable investment market by ensuring that financial products marked as sustainable are what they claim to be, the FCA will now look to engage with firms they see as outliers in the Sector.
Financial Crime and Market Abuse
The FCA also reminds firms that the trend towards investment in private assets requires a commensurate increase in anti-money laundering (AML), market abuse and financial crime controls, given the increased likelihood of complex ownership structures being in place around these assets.
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The FCA set out these supervisory priorities against a backdrop of encouraging firms to have effective governance frameworks and to ensure senior accountability for risks in the aforementioned priority areas. This highlights the FCA’s focus on substantive integration rather than box-checking.
In accordance with that approach, firms should ensure that the Letter is reviewed by their governing body and, where appropriate, (i) ensure they are resourced to engage with the planned multi-firm reviews this year; and (ii) are comfortable that their existing frameworks regarding valuation, outsourcing, retail distribution and AML/financial crime meet regulatory requirements.
Finally, the Letter emphasises the importance of the Sector to the UK economy and, in line with the UK government’s stated economic growth agenda, recognises the Sector as a priority area for growth. As part of this focus on growth, the Letter states the FCA’s intention to work with the Sector to develop a “vision” and to work on the FCA’s “regulatory and data frameworks” to support investment in the Sector. What exactly this entails remains to be seen, but it is clear that private markets remain an important focus of the FCA.
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.