The FCA has today issued a six page letter to CEOs of alternative investment firms about their supervisory strategy for such firms.
Charles Proctor, a regulatory partner at law firm Fladgate, comments on the letter as follows:
“The FCA has today issued a “Dear CEO” letter to authorised firms that manage alternative investments, either directly or through hedge funds/private equity funds. The letter seems to be a wide-ranging shot across the bows of the firms falling within the FCA’s “Alternatives Portfolio”. It suggests that there are still industry shortcomings in a variety of areas, including:
- Assessment of suitability of investments for both retail and elective professional clients
- Ensuring that clients can only graduate to the elective professional category if they meet both the quantitative and qualitative tests
- The management of conflicts of interest, especially where dominant shareholders have made material decisions in disregard of governance processes
- The requirement for adequate systems to manage funds operating with high leverage and thereby expose investors to greater levels of risk
- The need for systems and controls to mitigate the risks of market abuse
- The risks of inappropriate remuneration policies that create the potential for consumer harm
- The need to ensure that the marketing of ESG investments responds to established benchmarks and is properly documented.
“In short, the letter sets out a number of areas where the FCA may have detected weaknesses in the regulatory management of Alternative Portfolio firms. Authorised firms within this category should expect follow-up from the FCA, and should therefore now be considering a review of their systems and controls in these areas.”
David Newman, chief commercial officer of Delio, said: “We absolutely agree that companies must ensure they are only offering alternative asset classes to the very specific types of investor that they are suitable for.
“Traditionally, the process of distributing investment opportunities in alternative assets to clients has relied on manual, people-led operational models. This approach left a lot of potential gaps in the compliance process and created ‘regulatory black holes’ that firms would struggle to document from an audit perspective. In fact, the amount of paperwork involved with the investment process meant that, in some cases, shortcuts were much more likely to have been taken. Now, firms are increasingly using digital platforms to connect their clients with investment opportunities; this makes it much easier to ensure that the right deals are offered to the right investors, significantly reducing the possibility of mis-selling.
“But any companies still using more antiquated methods need to watch out, as the FCA’s letter is clearly giving notice that it is watching this sector more closely. And with the increased scrutiny, comes the chance of action. We would prefer that no company was found wanting in this area, as it could not just have a major impact on investors, but could also reduce confidence in any firm operating in the private markets space.
“So, all firms have a responsibility to ensure that their regulatory governance is robust, otherwise everyone potentially loses.”
