On 1 March 2024, the FCA issued an interim update (Update) to its August 2022 and February 2023 portfolio letters (Portfolio Letters) to alternative asset management firms setting out its updated supervisory priorities.

The FCA says that it expects firms to discuss the contents of the Update at a board or management committee level, including how it applies to their businesses and to take relevant action where necessary.

The Update reflects changes in the external risk environment and the FCA's upcoming priorities, although the FCA emphasises that it considers that the areas of focus are consistent with its previously communicated multi-year plan, as set out in the Portfolio Letters. The Update is relevant for firms in the FCA's "alternatives" portfolio which mainly includes firms managing or advising alternatives vehicles investing in the private markets (such as private equity, credit, real estate, infrastructure and hedge funds.

The areas covered by the Update include:

  • Change management. The FCA is concerned that, with broader pressures on the industry and transformational/strategic changes (such as cost cutting initiatives or mergers and acquisitions), firms may not be adequately resourced to handle current and planned regulatory changes. Accordingly, the FCA plans to look at the governance and resourcing of firms' change management programmes to ensure that potential harms to investors and markets are appropriately addressed.
  • Operational resilience. The FCA indicates that it intends to have further proactive engagements with firms on the topic of operational resilience in 2024.
  • ESG. The FCA will be introducing its Sustainability Disclosure Requirements (SDR) and investment labels regime this year and uses the Update to indicate its focus on firms making exaggerated or misleading sustainability-related claims.
  • Valuation of Private Assets. As has been anticipated for some time, the FCA will be undertaking a multi-firm review looking at valuation practices in respect of private assets. The Update states that the FCA will be looking particularly at personal accountabilities, the governance of valuation committees and board information and oversight.
  • Smarter Regulatory Framework. The FCA expects to make significant progress this year in implementing the government's Smarter Regulatory Framework, with a focus on MiFID, AIFMD and UCITS. Whilst significant parts of the existing regimes are expected to be retained in full in the FCA Handbook, the FCA has opened the door to make certain changes on the grounds of proportionality, supporting technological innovation and updating the regime for retail funds.
  • Assessments of value and consumer duty. The Update highlights a continued focus on price and value. To this end, the FCA will continue to engage with authorised fund managers on identified deficiencies in relation to Assessments of Value and will begin to look at products and services provided to unit linked funds from a Consumer Duty 'price and value' perspective. While unlikely to be of direct relevance to many alternatives firms it may be instructive in other contexts (e.g. retailisation platforms and products). The FCA will continue to focus on Consumer Duty more generally and expects to communicate to firms separately on the topic in due course.
  • Retail distribution. The FCA also states that it intends to consult on the PRIIPs replacement regime, as well as seeking industry views as part of the Advice Guidance Boundary Review.

Firms' senior management and legal and compliance teams should consider the Update at the level of the firm's governing body and whether any of their existing strategies and procedures need to be revised to address the additional points raised by the FCA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.