In a Dear CEO letter published last week (February 3), the regulator said asset managers are facing changing consumer needs due to the rising cost of living, volatile markets and a challenging economic environment, which all make it more difficult for companies to deliver good outcomes to customers.
“While good governance is always an expectation, it is particularly important during this period of heightened uncertainty,” said Camille Blackburn, director of wholesale buy-side at the FCA.
The regulator said ineffectual governance was the root cause of some asset managers failing to mitigate material risks or progress towards a better outcome for their clients.
In a more volatile market environment liquidity risks are relevant across a broader set of productsCamille Blackburn, FCA
The regulator said it expects asset managers’ governing body members to have “sufficient expertise”, and understand the level of exposure the firm has to risks, including ESG and product liquidity management.
The letter mentioned the issue of liquidity mis-matches in funds, seen in open-ended property funds and the LDI crisis, where market volatility caused by the “mini” Budget caused pension funds to scramble to fulfil collateral calls.
“Since our previous strategy letter, different market and pricing shocks have caused liquidity issues for LDI portfolios, property funds, and money market funds.
“In a more volatile market environment, liquidity risks are relevant across a broader set of products," Blackburn said.
The regulator voiced its concern over the quality of liquidity risk management in some asset managers, and said they should ensure operational systems and processes are fit for purpose, can be executed “at pace”, and can be scaled up to handle additional demand when required.
Finally, the FCA said it will be testing asset managers’ ESG claims, making sure firms deliver on the claims made in investor communications.
The regulator will also focus on ensuring governance bodies adequately oversee and review information from asset managers on product development, ESG and sustainability integration in investment processes, third-party and proprietary ESG information providers and any other sustainability claims made by the firm.