One of the UK FCA’s favoured ways of regulating is through “Dear CEO” letters, which seek to place a direct onus on CEOs to address FCA priorities. On 3 February 2023, CEOs of UK asset management firms were the recipients of one such letter. Much of the content is not surprising (e.g. the emphasis on consumer outcomes) but we highlight here some particularly notable points:
- Problems with inadequate governance are cited as a major reason for regulatory failures. Accordingly, firms experiencing failings should expect searching questions regarding the expertise of their governing body and senior managers, and the effectiveness of their management structures in key areas such as value assessments, financial health and oversight of ESG and stewardship considerations.
- Firms operating inadequate value assessment processes will be in the regulator’s cross hairs. The FCA says it will seek to identify firms that do not apply the minimum considerations, or assess value at the fund (rather than unit class) level, or assess performance using measures that do not reflect the fund’s investment strategy. The FCA will also look at the way firms “have built maturity of ESG in value assessment considerations”.
- Greenwashing is plainly also a major area of concern. The FCA will shortly be publishing the results of a review of firms’ ESG oversight practices. Firms will need to benchmark their practices carefully against these findings.
- The FCA is also concerned about the level of “incident reporting” by firms. Specifically, the letter emphasises that the FCA needs to be told immediately about material operational failures or cyber-attacks.
- Firms should review their planning for a solvent and orderly wind-down taking related FCA guidance into consideration, and notify the FCA immediately if they reasonably foresee financial difficulties.