On January 20, the Financial Conduct Authority (FCA) published a letter to the CEOs of UK-based alternative investment firms to outline the FCA’s view of the key risks of harm to the customers or markets in which such firms operate (the Letter). The FCA defines alternative investment firms as firms that predominately manage alternative investment vehicles (such as hedge funds or private equity vehicles), or manage alternative assets directly, or provide advice on such vehicles or assets.
In the Letter, the FCA outlined the following supervisory priorities:
- Investor exposure to inappropriate products or levels or investment risk: The FCA intends to review retail investor exposure to alternative investment products, to ensure that firms are aware of who their customers are and that they are exposed to an appropriate amount of risk. (This may be a response to recent concerns about the promotion of mini-bonds to retail investors, which resulted in this temporary product intervention in November 2019);
- Client money and custody asset controls: Regarding the Client Assets Sourcebook (CASS), the FCA intends to review whether firms that have permission to hold client money and safeguard custody assets are doing so in a robust and CASS-compliant manner;
- Market abuse: The FCA noted that, despite recent work on market abuse controls (see, for example, this Primary Market Bulletin), there is still “significant scope for improvement,” and therefore that more work may be conducted in the future;
- Market integrity and disruption: The FCA noted that alternative investment firms may adopt “very high-risk investment strategies,” such as strategies with “significant leverage.” If so, their risk management controls need to be “robust” enough to avoid “excessive risk-taking” and to mitigate “harm or disruption to financial markets;”
- Anti-money laundering and anti-bribery and corruption: The FCA is concerned that firms do not have “appropriate and proportionate systems and controls” to mitigate the risk that might “facilitate financial crime.” Therefore the FCA intends to review the systems and controls of firms in this portfolio; and
- EU withdrawal: In the Letter, the FCA drew attention to their updated Brexit webpages (available here), and noted that firms should be preparing for the end of the implementation period, which is expected to be on January 1, 2021.
The Letter is available here.