Following some very hefty fines levied by the FCA at recipients – including a £41mn fine to a British-American hedge fund and a £9.1mn fine to a European headquartered asset management firm – the FCA warns that it will consider enforcement action against firms that have failed to ensure conflicts are avoided, managed, or disclosed in a way that minimises harm to investors and markets.
Whereas most firms would consider their conflicts of interest to be centred around topics such as asset allocation or competing funds, the FCA notes that behaviour of individuals may also be viewed as a conflict of interest, having seen situations where processes were bypassed to make sales or increase assets under management.
Dominant shareholders making decisions contrary to internal governance are also noted.
Given the potential harm these conflicts may cause, the FCA draws attention to the aforementioned enforcement cases in what can only be described as a none too subtle hint.
Market integrity and disruption
The FCA is focused on alternatives firms’ risk functions, viewing a manager’s role as harnessing and managing risk. This in turn plays into the new requirement of the regulator to strengthen the UK’s financial sector and to promote growth.
Increased market volatility and rising interest rates have caused the FCA concern, particularly for firms with highly concentrated or leveraged investment strategies, which can negatively impact liquidity and wider market stability, which has led the regulator to warn that the boards of regulated firms should ensure their risk management functions are appropriately resourced.
The FCA observes that market abuse controls across the sector need to be improved.
In previous publications, such as the FCA Market Watch 69, the regulator comments on the need for firms to tailor market abuse monitoring to their individual business models to ensure that surveillance alert parameters and logic are properly established and reviewed and that market abuse policies are sufficiently detailed.
In this letter, the FCA warns that where firms do not comply, it will consider the need for criminal, civil or supervisory sanctions.
The FCA reminds firms that corporate culture is at the heart of business practices; that inappropriate remuneration practices incentivise conflicts of interest and the potential for harm; and that Mifid Pru firms have been subject to a new remuneration code since January 1 2022.
The FCA will look for evidence of staff being unable to speak up as a particular area of concern and firms should encourage a healthy culture of diversity and inclusion.
ESG: a strategy for positive change
Firms should ensure that environmental, social, and governance products are clear, fair, not misleading, and that firms’ actions match the stated claims.
Rules that require asset managers to make disclosures in line with the Task Force on Climate-Related Financial Disclosures will apply to alternative investment fund managers with ,ore than £5bn from 2023.