FCA Review of Smaller Asset Management Firms and Alternatives

What's new?

On 8 May 2025, the Financial Conduct Authority (FCA) published findings from its review of business models for smaller asset managers and alternative investment firms. This follows on from the FCA's work to identify business models in smaller firms which may present risks of customer harm.

What does the review say?

Alongside providing feedback from its findings, the FCA provided examples of good practice on the following areas:

High-risk investments (HRIs)

The FCA found that while the majority of smaller firms offering HRIs were able to clearly categorise their products, some had inefficient processes for the types of investor assessments they need to undertake or misunderstood their differences and applicability.

When promoting an HRI to a client, the FCA expects firms to have a clear understanding of the consumer journey through the use of:

• risk warnings

• banning incentives to invest

• effective client categorisation

• appropriateness assessments and

• preliminary assessment of suitability (PAoS).

For more guidance on HRIs, the FCA draws attention to its review of financial promotions for HRIs.

Conflicts of interest

Some firms held good control practice, however some firms had ineffective conflict management arrangements that increase the risk of consumer harm. For example, smaller firms where senior staff held more than one role, failed to recognise conflicts arising as a result of overlapping roles and responsibilities.

To mitigate risks of this nature, the FCA suggests that best practice may involve maintaining an accurate register of conflicts to identify at an early stage. This should be followed by documenting and reviewing these conflicts in the register, implementing mitigation strategies, and providing ongoing monitoring updates. Additionally, the compliance and senior management teams should regularly review the register.

Consumer Duty (the Duty)

Most firms have made efforts to incorporate the Duty into their activities. However, some smaller firms are yet to recognise how it applies to their business model and adjusting their processes accordingly.

The FCA found examples of retail investors being inappropriately onboarded to alternative investment funds (AIFs) with unclear product structures, uncertain drivers of return, and opaque charging structure. In certain cases, firms were charging substantial management fees which, led it either crystallised or potential future investor losses.

In light of these findings, the FCA would like to draw firms' attention to its Consumer Duty Board Report in which it set out suggestions as to how smaller firms should interpret the Duty.

Next Steps

While the review is aimed at smaller firms, the FCA notes that some of its findings may also apply to larger firms in the sector.

The FCA intends to keep working with firms where it has identified weaknesses to make improvements. It will continue to monitor firm conduct in these areas and will focus on the supervisory priorities as set out in its portfolio letter to asset managers and alternatives.