FCA warns alternative investment firms against increased scrutiny

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

In a letter to managing directors of alternative asset management outlining the watchdog’s alternative monitoring strategy for 2022, Nike Trost, head of the asset and pension policy department at the FCA, urged firms to modify their business practices in accordance with the new obligations.

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

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Despite a crackdown on the massive marketing of speculative investments to retail investors, inappropriate distribution and marketing practices by firms targeting traditional investors remain a concern, the regulator said.

“We have seen examples of informal governance processes compounded by poor due diligence and inadequate categorization of investors, leading investors with low risk appetites to access high-risk products that may not align with their objectives. “, we read in the letter.

The FCA has urged CEOs to conduct thorough investor assessments to avoid exposing investors with limited investment knowledge to “inappropriate investment strategies” and to ensure their products are not offered only to the appropriate types of investors.

“After receipt of this letter, companies that onboard elective retail or professional clients should review their processes to ensure they are effective, including procedures for verifying that elective professional investors meet the required quantitative and qualitative tests. by COBS 3.5,” wrote Trost.

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In the coming months, the FCA is expected to issue a questionnaire asking all alternative firms on its radar for information on their business model, products, investor categorizations and associated screening framework, with a keen eye on funds speculative.

Trost asked CEOs to place particular emphasis on conflict of interest, market integrity and disruption, market abuse, culture and ESG, areas she said needed to be addressed. improved.

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

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While it initially applied to the largest alternative companies, it will also apply to companies with assets under management exceeding £5bn from 2023.

“We expect affected companies to consider what steps they will need to take to be able to make these disclosures from 2023 as required,” she wrote.

David Newman, chief commercial officer of Delio, said: “The FCA’s letter makes it clear that they are watching this sector more closely. And with the heightened scrutiny comes the chance to act.”

“We would prefer no company to default in this area, as this could not only have a major impact on investors, but could also reduce confidence in any company operating in the private markets space.”