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Dear CEO Letter: Alternatives Supervision Strategy

Earlier this month the FCA updated its supervisory strategy and priorities for firms within its "Alternatives" portfolio in a Dear CEO Letter. The "Alternatives" portfolio encompasses a broad range of business models, with global hedge funds and private equity firms alongside many smaller providers.

The letter provides an update on the FCA's view of the key risks of harm that alternative investment firms, and the markets in which they operate, pose to customers. This in turn shapes the FCA’s supervisory priorities and points out where improvements can be made.

Boards of these firms are expected to identify the risks identified in the letter applicable to their business, and to then take the appropriate actions to address them.

The regulator's current supervisory priorities include:

1.Putting consumers needs first

  • Investment strategies that carry inappropriate levels of risk for their target client

Firms are reminded that they must consider the appropriateness or suitability of the investments they offer for their target customers. Risks can be reduced by by conducting thorough investor assessments.

  • Conflicts of interest

Boards are asked to review their procedures to ensure that conflicts are avoided, managed or disclosed in a way that minimises harm to investors and markets.

2. Strengthening the UK’s position in global wholesale markets

  • Market integrity

Robust risk and liquidity management is essential but even more so with increased market volatility and rising interest rates. Boards should ensure that risk functions are appropriately resourced, contemporaneous, and commensurate with the levels of portfolio and business risk being taken.

  • Market abuse

Firms are expected to have strong prevention cultures, effective systems and controls to enable them to discharge their obligations under the UK Market Abuse Regulation (UK MAR).

  • Culture

Firms subject to the MIFIDPRU Remuneration Code must apply the relevant rules from the performance period on or after 1 January 2022.

Firms should consider the steps they can take to provide an environment where diverse talent can flourish, and diversity of thought is encouraged.

3. ESG – a strategy for positive change

Firms should ensure that where products are labelled as being ESG focussed, documentation is clear.

Firms offering such products should expect to be subject to review to ensure marketing materials accurately describe their product, with funds offering clear and consistent disclosure.

Firms in-scope of the FCA’s December 2021 TCFD disclosure rules for asset managers ` and owners should already be considering what steps they will need to take to be able ` to make these disclosures from 2023 as required.

Firms are asked to contact the FCA if they have any queries about the letter.


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