FCA sets out supervision priorities for asset managers and alternatives firms

On 26 February 2025, the Financial Conduct Authority (FCA) published a portfolio letter addressed to CEOs of firms in the asset management and alternatives sector to explain its supervision priorities for the year: 

1. supporting confident investing in private markets;
2. building firm and financial system resilience against market disruption; and 
3. securing positive outcomes for consumers. 

These priorities are intended to help firms and the FCA to prioritise resources to those areas that are considered to be of the greatest significance at the moment.

As an overarching point, the FCA notes that good governance and a healthy firm culture are critical tools to achieve good outcomes. To this end, it will continue to focus on how firms’ governance arrangements are assigning senior accountability for the risks identified by the FCA, oversight by governance bodies, and ensuring appropriate management information supports good decision making. 

Outside its supervisory work, the FCA will also undertake targeted work to support trust in the market for sustainable investment and to tackle financial crime and market abuse. It also plans to engage with industry on a review of the Alternative Investment Fund Managers Directive (AIFMD) to streamline regulatory requirements and reduce regulatory burdens, which would be generally welcomed depending upon the specifics of the outcome of that review. 

Asset management as a priority growth sector

The FCA is keen to emphasise the importance of the asset management and alternatives sector for the UK government’s growth objectives. The way in which asset managers and alternatives firms respond to geopolitical and market events will continue to be crucial. In particular, the FCA highlights the importance of robust operational resilience to the smooth functioning of markets due to the increasing interconnectedness of the sector and reliance on third parties. 

With its secondary international competitiveness and growth objectives in mind, the FCA wants to support the UK’s status as an international investment hub and foster growth and innovation in the sector. The FCA will work closely with the industry and other stakeholders to develop a vision for the sector and intends to undertake work to strengthen and streamline its regulatory and data frameworks to support investment in areas such as private assets and digital innovation (including tokenisation). The FCA will engage with firms to discuss initiatives to unlock capital investment and liquidity, accelerate digital innovation to improve productivity, and consider ways to reduce the regulatory burden.

Supervisory Priorities

1. Supporting confident investing in private markets 

With rising demand for investment in private markets, asset managers are increasingly investing in their private market capabilities to meet that demand. This raises certain different risks and regulatory considerations, which are a key focus for the FCA.

In particular, the FCA notes that, without the frequent trading and price discovery of more liquid public markets, firms must employ judgement-based approaches to estimate private asset values. This carries an increased risk of inappropriate valuations, in particular if the firm does not have the required expertise or adequate conflicts management processes. 

In light of this, the FCA expects boards and valuation committees to be given regular and sufficient information on valuations to ensure effective oversight. The FCA also calls on firms to consider the findings from its recent multi-firm review on private market valuation practices (published on 5 March 2025) to ensure their valuation processes are robust, with a strong governance framework and audit trail. These findings will be used in the FCA’s review of AIFMD and will inform the FCA’s contribution to the International Organization of Securities Commissions (IOSCO) review of its 2013 Principles for the Valuation of Collective Investment Schemes.

In addition, the FCA expresses concern that poorly managed conflicts could increase the likelihood and severity of investor harm. To mitigate the risk of harm, the FCA will conduct a multi-firm review focusing on conflicts of interest at firms managing private assets. This will include an assessment of the oversight of conflict-of-interest frameworks by governance bodies and reviews by the three lines of defence to ensure investor outcomes are not compromised. 

Lastly, the FCA will continue to supervise the sector’s transition to retail offers of private market products with an aim to ensure that product development frameworks remain fit for purpose for private asset risks, that investors are given appropriate information about such products, and that firms are taking additional steps, where required, to ensure they deliver good outcomes to end-investors in line with the Consumer Duty (see our recent post identifying the implementation of the Consumer Duty as a focus area for asset managers).

2. Building resilience against market disruption

With market disruption becoming more frequent, firms should consider any persistent risks and weaknesses in their systems and make improvements to risk management practices where required. 

Informed by the vulnerabilities identified in the Bank of England’s system-wide exploratory scenario (SWES) report published in collaboration with the FCA in November 2024, the FCA will focus surveillance on prudent risk management, liquidity management and operational resilience. 

The FCA intends to continue to monitor liquidity risk and ensure IOSCO’s revised recommendations on liquidity management for collective investment schemes (November 2024 consultation) are in place across its systems. 

In addition, it will consider findings on margin preparedness from both the SWES and the Financial Stability Board’s final report of December 2024 on liquidity preparedness for margin and collateral calls and discuss any required actions with firms where appropriate.

The FCA will require assurances about risk management where it identifies outlier firms and funds, focusing in particular on those with high leverage, illiquidity or concentrated investment strategies. 

The FCA warns that operational frictions can limit firms’ abilities to react to market disruption and thus calls on firms to consider the resilience and effectiveness of their operational processes and collateral management, including oversight of third parties where services are outsourced.

3. Securing positive consumer outcomes

The FCA highlights the important role asset managers play in providing suitable products and services that support consumers’ financial goals. It also notes that the Consumer Duty requires firms to act to deliver good outcomes for retail consumers, and thus firms should continue to develop their monitoring capabilities to ensure they meet that requirement.

Currently, the FCA is carrying out a multi-firm review of unit-linked funds (discussed in the FCA’s 2024 interim portfolio letter) to assess price and value across the value chain to ensure good outcomes for investors. Its findings, including good practices, are expected to be published later this year. In addition, the FCA will also commence a multi-firm review of model portfolio services (MPS) this year focussing on how firms are applying the Consumer Duty. Again, it is expected that the FCA will share good practices of how firms are providing good outcomes to investors. 

Finally, the FCA intends to engage with firms affected by key policy proposals, in particular the Advice Guidance Boundary Review consultation (CP24/27) and the Consumer Composite Investments consultation (CP24/30), to make its disclosure regime more flexible so as to support smooth implementation of these proposals.

Focus on sustainable finance

One of the challenges for the sector will be to keep pace with change in the area of sustainable investment. The FCA will engage with firms on sustainability-related products to understand how labelling, naming and marketing rules are being implemented. This will allow the FCA to identify any outliers and engage with them as appropriate. 

Firms are encouraged to review the FCA’s Sustainability Disclosure Requirements (SDR) webpage and good practice disclosure examples for investment labels (see our blog post considering the introduction of these examples). 

Tackling financial crime and market abuse

The FCA highlights that investment in private assets requires risk management processes that are capable of handling financial crime risks (including fraud, money laundering, terrorist financing and bribery and corruption) connected with complex ownership structures. 

The FCA will review the effectiveness of firms’ financial crime systems and controls where it identifies weaknesses, with a particular supervisory focus on anti-money laundering (AML) controls in private markets funds (see our blog post identifying AML compliance and enforcement as one of the key trends to watch in 2025). 

Firms are expected to ensure their market abuse controls are sufficient to discharge obligations under the Market Abuse Regulation. The FCA emphasises the importance of identifying ultimate beneficial owners through proportionate risk-based due diligence on investors and robust KYC checks to mitigate the risks of firms being used to facilitate financial crime.  

What should firms do next?

Chief executives are expected to discuss the contents of the FCA’s portfolio letter with their Board, Executive Committee and accountable Senior Managers to consider whether the risk of harm discussed in the letter exist within their firms and implement strategies for managing such risks. 

This will include ensuring that the priorities identified by the FCA are given an appropriate level of focus and resources within the firm in order to address any particular areas of weakness or where additional improvements are required, including with respect to sufficient governance oversight and senior management accountability.