FCA increasing its scrutiny over alternative asset firms


The main risk warning rules will come into force on 1 December 2022, with the remainder landing on 1 February 2023

The Financial Conduct Authority is increasing its scrutiny over alternative asset management firms with retail client exposure ahead of new risk warning rules set to come into force in December.

The watchdog’s PS22/10 policy statement will aim to strengthen the financial promotions rules for high-risk investments, improve marketing restrictions and place higher standards on alternative managers.

In a letter to alternative asset management chief executives outlining the watchdog’s alternatives supervision strategy for 2022, Nike Trost, head of department for asset and pensions policy at the FCA, urged firms to amend their business practices in line with the new obligations.

The main risk warning rules will come into force on 1 December 2022, with the remainder landing on 1 February 2023.

Despite a crackdown against the mass marketing of speculative investments to retail investors, inappropriate distribution and marketing practices by firms targeting mainstream investors remains a concern, the regulator said.

We have seen examples of informal governance processes compounded by poor due diligence and inadequate investor categorisation leading to investors with a lower risk appetite accessing high risk products that may not match their objectives, the letter read.

The FCA urged CEOs to conduct thorough investor assessments to avoid exposing investors with limited investment knowledge to ‘inappropriate investment strategies’ and ensure their products are only offered to appropriate investor types.

Following receipt of this letter, firms that onboard retail or elective professional customers should review their processes to ensure they are effective, including the procedures for checking that elective professional investors meet the quantitative and qualitative tests required under COBS 3.5, Trost wrote.

In the coming months, the FCA is set to issue a questionnaire asking all alternative firms on its radar for information about their business model, products, investor categorisations and associated control framework, with a close eye on hedge funds.

Trost asked CEOs to place special importance on conflicts of interest, market integrity and disruption, market abuse, culture and ESG, areas she said needed improvement.

In December 2021, the FCA mandated asset managers, including authorised alternative investment fund managers, to make disclosures in line with those recommended by the Taskforce on Climate-related Financial Disclosures.

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