FCA publishes findings of good and poor practice from its review of small asset managers

On 8 May, the FCA released findings from its latest review aimed at smaller asset management firms. 

Whilst the review focussed on responses from 410 firms managing assets under £1 billion (representing roughly 40% of the smaller asset manager population), the FCA has been keen to point out that the findings (which highlight examples of good practice, as well as areas needing improvement)  will also be of relevance to other audiences including larger firms in the sector, and portfolio and investment managers.  

The findings stem from work undertaken to identify business models that pose greater risks of customer harm (announced in the FCA's  August 2022 portfolio letter on its alternatives supervision strategy - see our earlier blog post here).  The aim is that this will support new market entrants and smaller or growing firms by offering benchmarking examples of sound risk management practices and clarifying regulatory expectations.

Boards or management committees are directed to review the publication in order to identify and manage key risks of harm, deliver good outcomes for consumers and support confident investing and economic growth.

The FCA’s findings focus on three key areas:

1. High-risk investments (HRIs)
   The FCA's review focused on how firms, including UK AIFMs, complied with COBS 4 rules when marketing HRIs such as restricted mass market investments and non-mass market investments. The FCA concluded that most firms offering HRIs successfully categorised their products. However, the FCA identified that some firms lacked robust processes to ensure these investments were only sold to appropriate clients.
2. Conflicts of interest
   While some firms demonstrated strong conflict management measures, the FCA identified that others fell short, especially where senior staff held multiple roles within their organisation. These overlapping responsibilities often led to conflicts not being adequately identified, documented or disclosed.
3. Consumer Duty
   Many firms showed good progress in embedding the Consumer Duty into their operations. However, the FCA found that some smaller firms still need to assess how the Duty applies to their specific business models and adjust their processes accordingly.

Next Steps
Alongside the work for firms to review where they can learn lessons from the FCA's review, the regulator has reiterated its intention to continue monitoring compliance - intervening where necessary.  The FCA is particularly focussed on its supervisory priorities as set out in its  Asset Management and Alternatives February 2025 portfolio letter (see our blog here).  

For firms seeking to grow their private market offerings, the FCA gives a reminder of its recent findings in its review of  Private market valuation practices (see our blog post here), which highlighted the importance of assessing capabilities, oversight frameworks and controls in enabling confident customer investment in this growing asset class.  

Resources:

You can find the FCA's smaller asset managers and alternatives business model review here