Portfolio letter: Our Asset Management Supervision Strategy [pdf]

The Financial Conduct Authority, FCA, has published an open Dear CEO Letter addressed at asset managers and their firms as regards key risks that they potentially pose to their customers or the markets in which they operate. The letter thereby briefly explains those risks and outlines the FCA’s expectations and supervisory priorities in these matters.
The key points discussed in the letter are the following:
(1) Product Governance: Product governance refers to actions a firm is taking to ensure that the product meets the needs of investors and delivers a good outcome to such. Therefore, solid product governance includes steps to prevent excessive costs, to design a product in accordance with the needs of investors, and to deliver it to the target market only (and qualified investors). Although there have been significant improvements in this area since the last issuance of a Dear CEO Letter, there’s still room for improvement, so the FCA. Particularly in view of the upcoming consumer duty, asset managers are reminded to closely reflect on their target markets and their corresponding marketing practices to ensure that the products suit the needs of customers and are distributed and marketed in a fair manner.
(2) ESG Investments: Due to the increase of ESG product demand by investors and product offerings among asset management firms, there’s an increased risk of greenwashing and inadequate product disclosures. Therefore, the FCA plans to concentrate on evaluating such disclosures, on reviewing the ESG-investment and product governance strategies of asset managers, and on examining the ESG claims made by firms. In this context, the regulator also reminds asset managers of their upcoming new TCFD (Task Force on Climate Related Financial Disclosures) aligned disclosure requirements.
(3) Product Liquidity Management: As recent market turmoils have shown, investment funds are still vulnerable when it comes to market volatility and the management of liquidity. Therefore, the FCA reminds asset managers to ascertain an effective liquidity management in their funds and to take prompt action to mitigate or resolve potential liquidity issues. Also, asset managers are highly recommended to apply adequate liquidity tools, not least to ensure that investors are treated fairly when exiting their investments (late).
(4) Financial and Operational Resilience: In this context, the FCA primarily emphasizes the need of asset managers to ensure resilience in connection with the use of third-party service providers, including intra-group providers, and resilience as regards critical business operations and technology. Firms shall make proper investments in IT-infrastructures and controls to ensure operational resilience. As far as financial resilience is concerned, the FCA primarily notes the need to ensure liquidity as it expects more headwinds to come. Additionally, the FCA expects firms involved in custody of customer assets to take adequate steps to ensure the safeguarding of customer funds. The FCA announces in this context that it will „conduct targeted monitoring visits“ to examine the practices of asset managers and their firms.
The FCA concludes its letter by noting that supervised asset managers are expected to reflect on their own practices in above noted areas and take adequate measures where ever shortcomings are identified. The regulator also announces an upcoming „policy discussion“ on the effectiveness, scope, and proportionality of its current regulatory framework.