Top risks for asset managers in the UK in 2025

With challenging market conditions, a significant amount of consolidation in the industry and the introduction of several important legislative and regulatory changes recently, 2025 promises to be another interesting and potentially dynamic year for the asset management industry.  In this blog post, we have outlined our pick of the top risks for asset managers in 2025, many of which are interlinked. 

Managing responses to geopolitical and market events

2025 brings significant political change in the US - a key market for asset managers and a jurisdiction with influence over the money markets of countries around the world. The UK is as exposed as any other country to the Trump administration’s geopolitical strategy. In addition, things are not necessarily smooth at home - concern about domestic fiscal policy can lead to market turbulence, as the first few weeks of 2025 have already shown.

The way in which asset managers respond and manage their response to geopolitical and market events will continue to be key in 2025. Rapid and sudden changes in portfolio valuation bring into focus a number of issues, including around: (i) internal processes for liquidity and collateral management; (ii) communication and dissemination of client instructions related to these geopolitical and market events and; (iii) internal oversight and governance, including over decision making by portfolio managers.

The crisis which followed the 2022 mini-budget is a good example. While disaster was averted with the intervention of the Bank of England, the unprecedented turbulence in gilt yields had a significant impact on gilt-focused LDI strategies. Many asset managers were forced to sell gilts held in their clients’ portfolios to generate the liquidity needed to post collateral. Potential liability for asset managers here could have arisen in relation to their role in designing those investment strategies, managing liquidity in client portfolios and/or the way that transactions were executed in the turbulent market.

ESG litigation and regulatory enforcement 

The risk of ESG-related claims (both litigation and regulatory) being brought against asset managers remains very high, particularly in relation to allegations of greenwashing. Investors, action groups and regulators globally are focussed on the way that sustainable funds are being marketed and whether investments in those funds are in substance what investors would expect given the way the funds are described – this is partly because this type of misrepresentation is much easier to establish than misrepresentations relating to more complex matters such as transition planning – and because regulators are anxious to build investor trust in sustainable markets, given their value. All of the enforcement action and litigation against asset managers has at this stage been brought outside the UK, although it is indicative of what UK-based regulators and claimants are considering. 

The Australian Securities and Investments Commission (ASIC) alone has now brought three successful actions against asset managers for misleading and deceptive conduct in the way that sustainable funds were marketed, and the SEC has done the same, including very recently against WisdomTree Asset Management Inc. In the UK, the FCA is also focussing on sustainable funds and labelling, although to date it has chosen to implement regulation and issue guidance rather than take enforcement action; it implemented its Sustainability Disclosure and Labelling regime last year and very recently, in November 2024, issued additional guidance on how funds can meet the requirements. The FCA also has its more general anti-greenwashing rule to use in this context (and indeed, this rule could be used by private persons, as well as the FCA, to bring greenwashing claims against asset managers under s138D of the Financial Services and Markets Act 2000 in relation to the way that sustainability characteristics of products or services are described).      

Other types of ESG-related claims that asset managers could face include claims challenging the credibility of their net-zero plans or broader ESG strategy (and these claims are already being brought in other industries), claims for breach of fiduciary duty (potentially because they have prioritised sustainability over financial reward, or vice versa), and claims and/or OECD complaints arising out of their connection to other companies or industries that are perceived to be damaging in some way. 

Implementation of Consumer Duty 

For firms in a distribution chain involving retail customers, the implementation of the Consumer Duty is likely to receive particular focus this year, with the risk of the FCA taking action for egregious breaches. Asset managers must already comply with the COLL Assessment of Value rules, but the Consumer Duty’s price and value outcomes apply fair value requirements more broadly, to other funds and services. Firms will want to consider, among other things, how they ensure that consumers are receiving fair value across this broader spectrum, how they are testing and documenting their fair value assessments, and whether they have appropriate governance arrangements in place in light of the new focus on outcomes. 

The FCA expressed its concerns some time ago that asset managers should ensure that they do not prioritise a fund’s profitability over value for money for investors. It has also now taken action for failings in this area; last year the FCA imposed significant restrictions on London Stone Securities, for various reasons, including that the firm had charged its clients excessively high fees in relation to portfolio management, inactivity fees and commission, regardless of portfolio size, and that it had not provided its clients with fair value, in breach of the Consumer Duty.

The FCA has made clear that in the year ahead firms should expect a general focus on the implementation and embedding of the Consumer Duty as part of any supervisory engagement, and there is a planned consultation on rules for better support for consumers in retail investments and pensions in H1 2025. The FCA is releasing additional guidance in relation to certain aspects and of the Consumer Duty and/or the way it is being implemented in different sectors periodically, and which will also need to be factored into firms’ strategies where relevant. 

Technological disruption 

In recent years asset managers have increasingly begun to use AI, and in particular generative AI technology which is integrated into middle and back office functions (e.g. reporting, data processing and generating models and/or trade ideas). The FCA and PRA have, in statements published in 2024[6], made clear that they expect regulated firms to be able to explain their use of AI to regulators, especially the steps taken to understand and manage the risks associated with the deployment of AI. Regulated firms will therefore be expected to have, for example, appropriately delegated responsibility for oversight of AI-driven processes under the SMCR and to ensure that the use of AI is consistent with the Consumer Duty where applicable (mentioned above) and the FCA’s Principle 3 in relation to adequate risk management systems.

Risks relating to the use of AI may arise, for example, where AI is used to automate order strategies but is inappropriately calibrated such that there is a failure to carry out the intended instruction. In that scenario, the asset manager could face litigation risk – for breach of its investment mandate for example and regulatory scrutiny over the adequacy of its systems and controls. The simple example above highlights the importance of investing sufficient time and resources at an early stage to understand, test and document in detail how its AI decision-making systems operate.

Prevention of financial crime and new failure to prevent offence for fraud 

The prevention of financial crime is also an important matter for asset managers to consider, and as for other types of financial institutions, the scale and complexity of the financial crime risks faced by asset managers is increasing exponentially. Asset managers will want to consider whether their systems and controls are appropriate in light of current and emerging risks.  That includes both financial crime risks posed by clients (particularly where clients are using complex investment structures so that the source of funds is not clear and/or where funds pass through other jurisdictions without equivalent financial crime controls), and also potential financial crime risks posed by target investments. 

Compliance with the UK sanctions regime also remains important, as sanctions enforcement activity by OFSI continues to intensify and the use of complex and opaque ownership structures can result in asset managers unknowingly dealing with individuals and/or assets subject to sanctions. Asset managers will want to ensure that they are conducting regular and robust reviews of their due diligence, screening and escalation processes here. 

Another key legislative change firms should have in mind is the landmark Failure to Prevent Fraud offence in the Economic Crime and Transparency Act 2023, which is due to come into force on 1 September 2025 and which is likely to apply to large asset managers. 

The scope of this offence is wide, with an organisation liable for failure to prevent fraud if one of its associated persons commits a specified fraud offence with an intention to benefit the organisation. Liability under the new offence may be occasioned if, for example, an employee engages in dishonest sales practices or hides important information from investors in a bid to generate greater returns. To avoid liability, asset managers must have “reasonable fraud prevention procedures”. Whilst the precise scope of these procedures has not yet been tested, there is likely to be substantial overlap with existing regulatory requirements, including transaction monitoring and robust and effective checks by second and third line functions.

Conclusion 

Given the market challenges, the new pieces of legislation and regulation outlined above and the ongoing but increasingly important risks in relation to technological disruption and financial crime, 2025 may well be a challenging one for the asset management industry. Careful consideration of likely risks and the governance arrangements and risk management procedures in place to manage them will be crucial; systems and controls failures (particularly in the contexts described above) will be what regulators and investors and potential claimants are likely to be focussed on this year. For asset managers acquiring other businesses, the way that these risks are assessed against the controls in place and then integrated into existing governance and risk frameworks will be particularly important.