top of page

Dear CEO Letter: Alternatives Supervision Strategy

The FCA have issued a Dear CEO letter to firms in the alternative investment sector outlining their view of the main risks of harm that these firms, and the markets in which they operate, pose to their customers. They note that this in turn, reflects how the sector will be supervised.

The letter addresses the following:

Investment strategies that carry inappropriate levels of risk for their target client: This includes reminding firms to ensure that alternative investments are only offered to appropriate investor types, and that the investments meet client needs. The letter references PS22/10 regarding the new rules for financial promotions relating to high risk investments, as well as the implementation of the Consumer Duty.

Firms should note that the FCA will be issuing a questionnaire asking all portfolio firms for information about their business model, products, investor categorisations and associated control framework.

Conflicts of interest: Firms are reminded of their responsibilities under SYSC 10: Conflicts of Interest, including that boards should review their procedures to ensure conflicts are avoided, managed, or disclosed in a way that minimises harm to investors and markets. The letter takes the opportunity to remind firms of the possibility of enforcement action/ fines where conflicts are not managed appropriately.

Market integrity and disruption: The FCA has seen firms overestimate liquidity in the stressed markets and seen situations where leveraged structures have come under strain. Firms are therefore reminded of their requirements and it is noted that assessments of appropriate risk controls will continue.

Market abuse: It was once again noted that market abuse controls need to be improved. The FCA expects firms to have individually tailored, strong prevention cultures and effective systems and controls to enable them to meet their obligations under UK MAR.

Culture: The focus here is on how senior managers and firm policies influence an organisation’s culture, particularly if this is so in a firm with dominant founders/ senior individuals. The letter touches on the role of diversity and inclusion in a healthy culture. Following on from Discussion Paper 21/2, the FCA plans to issue a Consultation Paper later this year and expect firms’ boards to fully consider this aspect of their organisation.

ESG: The FCA recognises that it is important that investors have confidence in the ESG products they are being offered. They note that this area continues to be a priority for the Asset Management department and that firms should ensure that documentation of such products are clear, not misleading and that firms’ actions match the stated claims.

The full letter can be read here.


bottom of page