The FCA’s Dear CEO Letter to Asset Managers

The Financial Conduct Authority (FCA) has this week published a new Dear CEO letter (dated 20 January 2020) to asset managers highlighting a number of areas where, in the FCA’s view, standards of governance at the level of the regulated entity fall below the FCA’s expectations.

In many senses the FCA’s letter pulls together themes that will already be familiar to readers of this update and the Insights published over the past 12 months.

But perhaps most significantly this Dear CEO letter is the first clear articulation of the new year of the FCA’s priorities for 2020 for the asset management sector – priorities that will be mirrored by the FCA’s Supervisory and Enforcement Divisions – and includes a number of specific expectations and proposed initiatives that asset management firms can now expect to be a focus for the FCA in the year ahead, a heads-up from the FCA ahead of the publication of its new business plan later this year.

Each of the themes identified by the FCA is deserving of detailed discussion in its own right, and many have been the subject of previous Insight updates from us, but we have set out below the key insights that can be taken away from this latest FCA publication on each of these themes, although noting that many are reminders as opposed to entirely new points to consider.

SMCR

• The FCA will be conducting a review in the first 6 months of this year evaluating the effectiveness of governance across the asset management sector, with a particular focus on the implementation of SMCR.
• Lines of accountability and responsibility for senior management functions must be clear, and the SMCR should be seen as an opportunity to deliver high standards of governance rather than a standalone compliance project.

AMMS

• The FCA will be carrying out work in the first half of this year to understand how effectively firms are carrying out value assessments and will be seeking evidence of meaningful challenge at AFM boards, including on costs, fees and product design.
• The publication of metrics, such as on long-term underperforming active funds and trends within the asset management sector, are planned by the FCA with a view to providing evidence of whether the AMMS remedies are having their desired effect.

Product governance

• The FCA has begun a review to assess how effectively new product governance provisions have been implemented across the asset management sector. The letter suggests that a focus of this review will be on funds tracking an undisclosed index or where fees exceed target returns.
• In parallel with its broader product governance review, the FCA is reviewing how effectively “host” ACDs undertake their responsibilities and seeking evidence that such firms discharge their responsibilities effectively. The letter makes specific reference to the need for the management of conflicts of interest that may arise where host ACDs may be concerned to offer a more assertive challenge for fear of loss of revenue from the investment manager.

Liquidity management

• Effective management of liquidity risk in funds is a central responsibility for any AFM, including in circumstances where an AFM delegates investment management to another person.
• A reminder of recent publications by the FCA and the Bank of England (30 September 2019, 4 November 2019 and 16 December 2019) concerning liquidity management and a warning that the FCA will take prompt action to ensure any liquidity issues identified by the FCA through its interaction with depositaries are mitigated or resolved by AFMs.

LIBOR transition

• The FCA expects all regulated firms to take notice of its Dear CEO letter on LIBOR published in September 2018 to dual-regulated firms only as an indication of the FCA’s broad expectations on the LIBOR transition.
• Data is currently being gathered from asset management firms by the FCA to enhance its understanding of firms’ business models and their exposure to LIBOR risk, with a view to further communications on the FCA’s specific expectations for LIBOR transition in due course.

EU Withdrawal Agreement

• The FCA expects asset managers to consider how the 31 December 2020 end to the implementation period will impact asset managers and their customers and what action needs to be taken to prepare for the expiry of that implementation period.

Operational resilience

• A reminder of the FCA’s expectation that firms manage technology and cyber risk appropriately, including via oversight of third party firms and intra-group service providers.
• Asset managers which the FCA deem to have a greater risk of causing harm are now subject to proactive technology reviews and those asset managers can expect the FCA to be in contact if selected to participate or as part of planned ad-hoc reviews to review the effectiveness of cyber risk controls.

The Letter is one of three Dear CEO letters published in quick succession by the FCA, the others being addressed to CEOs of firms in the FCA’s alternatives and financial advisers portfolios.

Please also see our summary of the alternatives letter and our summary of the financial advisers letter.

For further information on these themes and other topics of interest in the asset management sector please visit our Insights on the latest issues and legal developments facing your business or the Simmons & Simmons contacts listed.