On the 20th January 2020, the FCA published a ‘Dear CEO’ letter outlining its Alternatives Supervision Strategy and their view of ‘the key risks of harm that alternative investment firms pose to their customers or the markets in which they operate’. The purpose of this letter is for the FCA to outline its supervision strategy and its key areas of focus for the coming months.
The FCA has released this letter as they feel there is room for improvement around the standards of governance, particularly at the level of the regulated entity. They then outlined six priorities:
Investor exposure to inappropriate products or levels of investment risk:
- The FCA has outlined some considerations that reduce the risk of consumers having inappropriate exposure to certain investments or levels of risk:
- o Identify client type and investment need when manufacturing or distributing products;
- o recognising that alternative products may only be appropriate for a niche market;
- o complying with relevant restrictions on marketing to retail investors;
- o adequately assessing the appropriateness or suitability of alternative investments for retail investors.
- Where clients ‘opt up’ to professional status, the FCA expects a robust assessment of knowledge and experience. In particular, the FCA will be testing that firms are aware of exactly who their customers are and that they are placing a clear focus on acting in their best interests.
Client money custody asset controls
- The FCA has reminded firms that they must follow the rules set out in the Client Asset Sourcebook (CASS) whenever a company holds or controls client money, or, safeguards custody assets.
- The FCA is also reviewing retail investor exposure to alternative investment products and is testing whether firms that have permission to hold client money and safeguard custody assets have put in place a robust framework to remain CASS-compliant.
Market abuse
- The FCA generally observes that market abuse controls across the alternative sector have some significant room for improvement.
- The FCA expects firms in the alternative sector to ensure their market abuse controls enable them to discharge obligations under the Market Abuse Regulation (MAR) making sure these are sufficiently comprehensive and tailored to their business models.
- The FCA outlines a recent assessment they made of the adequacy of market abuse controls in the sector. They visited firms and provided feedback as well as sending out a questionnaire to a large sample of firms on the buy-side.
Market integrity and disruption
- The FCA states that the use of leverage and illiquid investments presents a risk to alternatives investment managers’ portfolios and can also create risk for the wider markets.
- They expect firms to operate robust risk management controls to avoid excessive risk-taking and mitigate market disruption.
- The FCA also says that they might undertake in-depth assessments of firms which adopt high-risk investment strategies.
Anti-money laundering
- The FCA restates the importance of Due Diligence on third parties and Client Due Diligence (CDD)/Know Your Client (KYC) checks.
EU withdrawal
- The FCA reminds firms that EU law will continue to apply and passporting will continue until the end of the implementation period which is due to operate until 31 December 2020.
- The FCA asks firms to assess how the end of the implementation date will affect firms and their customers and what action may need to be taken ahead of 1 January 2021.
- The FCA also draws attention to its Brexit webpage which it will continue to update.
To read the whole ‘Dear CEO’ letter on Alternative Supervision Strategy click here.
How can we help?
At Laven, our consultants are on hand to help identify the actions your firm needs to take to ensure you are compliant with new regulations and aware of all the risks outlined in this report. Whether this is through assisting with new policies and procedures that need to be put in place or providing online/in-person training for staff to make them fully aware of the regulatory burden.
Laven has also developed a Brexit solution for Asset Managers to benefit firms who do not have an independent entity in the EU. Named Lumen, the solution can assist you by working with your sales staff on a part-time basis to distribute your products throughout the EU.
Laven has also built Laven Tech, a unique Regulatory Technology (RegTech) solution that leverages advanced technology combined with our vast subject matter expertise. Our RegTech solution is designed to assist fund managers, service providers and investors to meet today’s growing demands.
If you would like to find out more, please fill out a contact form or give our London office a call on +44 (0)20 7838 0010.
