FCA calls on private market firms to manage conflicts of interest in line with rapid growth: frameworks must match substance, not just legal form

The Financial Conduct Authority urges private market firms to strengthen their management of conflicts of interest after finding that standards vary considerably across the industry. The findings follow its multi-firm review into how private market firms identify, manage, mitigate and disclose conflicts of interest in private market assets. The FCA expects firms to act on its findings, running a gap analysis both now and as their business evolves and identify gaps so they can strengthen controls. Importantly, the FCA frames this as a continuing obligation, not a one-off box-ticking exercise. 

The scope of the review focused on fund management, discretionary portfolio management and advisory activities carried out in or from the UK in connection with investment in private equity, private credit or real estate. The FCA explains that, whilst the feedback will be directly relevant to private market firms, other firms should also take account of its observations as they may have broader relevance to how asset managers identify and address potential conflicts within their business. 

Key messages

• Firms should ensure their management of conflicts of interest keeps pace with growth in their size and complexity: Firms' conflicts arrangements must keep pace with growth in scale and complexity - the message from the FCA is clear - a limited UK permissions profile does not, on its own, justify a narrow conflicts framework if, in substance, UK teams are doing origination, structuring, allocation, valuation input or other lifecycle work that generates real conflict risk. See 'More complex business models need stronger controls' below.

• Effective conflicts management will become increasingly important: As private markets keep growing, effective conflicts management will matter more, not less, to investor outcomes and market confidence. The FCA expects firms to be able to identify, record, manage and disclose conflicts effectively, and demonstrate that investors are being treated fairly.

• Design out conflicts, don't just control them: Firms should consider whether conflicts can be reduced or avoided through the design of business models, structures and processes, rather than relying solely on controls to manage them after they arise.

• LPACs: Limited Partner Advisory Committees feature heavily throughout the review: the FCA found engagement varied widely - some firms treated LPACs as central to their conflicts management, while others "consulted LPACs only when legally obliged to, and provided limited information." More fundamentally, the FCA found that "LPACs weren't always effective as a conflict-management tool": typically only the largest investors were permanently represented, smaller investors had less direct input, and some firms exercised discretion over whether to consult LPACs at all, "which could result in inconsistent outcomes."  Looking ahead, the FCA flags that newer fund structures without LPACs or an equivalent body may make investor consultation a less effective conflicts tool altogether. Its conclusion is a clear instruction to the market: informed investor consent "can be a valuable means of handling conflicts but firms should be aware of any limitations that might apply and should not rely on consultation with a subset of specific investors as the primary mechanism to manage material conflicts." Investor consultation "should operate alongside strong governance, oversight and conflicts-management arrangements" – not as a substitution.

• Compliance cannot mark its own homework: the FCA warns of the risks of second line compliance teams so embedded in deal-level decisions that they lose the independence to review those same decisions afterwards (see ‘Oversight of conflicts’ below).

• Areas of recurring weakness: In particular, the FCA reported that it found recurring weaknesses in the oversight of related-party transactions and cross-fund transfers; policies for dealing with gifts and entertainment; and safeguards to protect confidential information. 

The findings

In the feedback, the FCA sets out examples of good practice and identifies areas which firms should consider and act on to strengthen their governance, controls and oversight. These are set out in further detail below.

Governance and oversight

• Firms have different inherent conflicts of interest, reflecting differences in business models and ownership structures: Conflicts risk varies depending on firms’ business models, investment strategies and corporate ownership structures. As firms expanded across asset classes, the FCA found the range of potential conflicts increased, requiring more sophisticated governance.

• More complex business models need stronger controls: The FCA found a clear link between a firm’s business model and the level of inherent conflicts risks arising across its operations. The FCA found that conflicts arrangements "had not always evolved in line with changes in firms' business models, ownership structures, product offerings and activities", and it wants firms to treat conflicts management as "a dynamic capability that develops alongside their business, rather than a static compliance framework." Firms should not assume that arrangements built for a simpler business will remain fit for purpose as the business grows in scale and complexity. Further the FCA found that "some firms adopted a legal-form assessment that characterised their UK-based activities as investment advisory activities, because formal investment decisions were taken by overseas entities," and that in these cases "UK conflicts frameworks were often more narrowly scoped, focusing primarily on personal conflicts or relying heavily on arrangers operated by overseas entities." Critically, the FCA says it "observed instances where conflicts identification, governance, and oversight arrangements did not fully reflect the substance, scale and complexity of activities undertaken in the UK." For example, in cases where UK-based staff were frequently involved in significant parts of the investment lifecycle, including activities prone to significant conflicts of interest – firms with frameworks built around the offshore-decision-making model were less able to show that they had identified, assessed and managed conflicts in a way that reflected the risks that their UK operations created. The message here is clear: the FCA expects firms to operate frameworks that reflect the substance of their activity and the conflicts arising from them, not merely their legal form.

• Identifying conflicts promptly: Firms must be able to identify conflicts promptly and comprehensively to manage these risks well and avoid poor investor outcomes or damage to firms' reputations. Firms with the strongest arrangements embedded conflict identification throughout their investment lifecycle using training, escalation routes, monitoring and integrated systems. Firms with weaker approaches often relied heavily on individual judgement and informal processes. Conflict identification processes must be proportionate to the nature, scale and complexity of a firm’s activities and evolve as needed.

• Internal conflicts documentation: Some firms had more comprehensive policy and procedure documents which had assigned responsibilities for identifying conflicts and operating mitigating controls to people with roles in the firms’ three lines of defence. Where firms had repurposed policy and procedure documents created elsewhere in the group for use in their private markets business, it was important that these had been tailored sufficiently to reflect the specific risks and activities associated with private markets.    

• Using software, training and keeping records: Good practice included using third-party software to track conflicts and making a full audit trail of how each conflict was handled. The FCA expects firms to maintain adequate records demonstrating compliance with policies and obligations, and ensure adequate ongoing training for staff.

• Oversight of conflicts: Firms with strong arrangements operated dedicated governance committees (with real time referrals for handling key conflicts) and robust oversight arrangements. The firms judged to have the most effective arrangements "actively involv[ed] control functions in both the first and second lines of defence," undertook independent periodic reviews, and provided real challenge - supported by multi-layered governance and clear escalation channels, including to LPs where appropriate. But the FCA also identifies a structural tension that firms need to manage carefully. In some firms, second-line compliance teams were so heavily embedded in running conflicts processes for new deals - acting, in the FCA's words, "much like an investment bank's control room" - and were so involved in due diligence, allocation and valuation decisions, that this "could reduce the compliance function's ability to provide independent review of those decisions after the event." The FCA's formal expectation is that firms "provide effective challenge and oversight of conflicts management arrangements, supported by strong second-line compliance oversight and periodic third-line assurance reviews." The FCA also flags a gap in third-line assurance: only 52% of firms in phase 1 of the review said internal audit had a role in reviewing the conflicts framework and its application at all. The FCA's conclusion is that firms "should therefore carefully consider whether their oversight arrangements are sufficiently effective to support and oversee the consistent delivery of high standards of conflicts management." The FCA also noted varied use of LPACs, reiterating that investor consultation should operate alongside strong governance, oversight and conflicts-management arrangements (rather than as a substitute).

Personal conflicts

• Personal account dealing and other personal investments: Personal investments are a common source of conflicts where employees’ interests overlap, compete or interact with those of investors. All firms operated controls around person account dealing. 

• Gifts and entertainment: The FCA’s principal concern with some firms’ arrangements was not the absence of policies or the lack of pre-defined notification thresholds but whether these firms could demonstrate that their arrangements operated effectively. Stronger controls existed where firms set clear standards in gifts and entertainment policies, implemented active oversight, kept robust records (with detailed registers recording value, business purpose, conflict considerations and approval decisions, creating a robust audit trail), and monitored patterns over time.

• Areas of higher risk and exposure: Sporting and other high-value hospitality events represented a recurring area of heightened risk and required enhanced scrutiny, involving clear business rationale, and documented approvals. Firms should also take account of cumulative exposure (rather than assessing each event in isolation)

• Third parties and conflicts: Whilst some firms were able to show evidence that gifts and entertainment had been approved and recorded, there was less evidence of how the firms assessed and managed the conflicts of interest arising from them.

Conflicts across the investment lifecycle

• Origination and deal sourcing: Firms with stronger arrangements identified conflicts early through independent screening and early legal and compliance engagement (as opposed to relying on first-line judgement or retrospective review once a transaction had already progressed).

• Clear roles and responsibilities: Stronger frameworks embedded conflicts management within formal decision-making and oversight processes. These were supported by escalation routes and independent challenge.

• Information controls: Stronger arrangements had active compliance involvement in monitoring and surveillance, applying clear restrictions around information sharing under NDAs, the establishment of information trees and chaperones for discussions that risked crossing information barriers.

• Allocation: Firms with strong approaches had clear documented allocation frameworks and used pro-rata methodologies for oversubscribed deals, dedicated allocation committees (e.g. to provide oversight when conflicts arose and exceptions were made to policy) and periodic reviews of outcome. 

• Connected and multi-party transactions: These transactions create heightened conflicts risks and require enhanced governance and oversight.  Better firms maintained clear separation between investment functions and transaction oversight, used independent valuations on each side, and engaged LPACs through consent or timely disclosure. 

• Cross-fund transactions and continuation vehicles: Because firms may sit on both sides of a transaction, strong governance, independent challenge and transparent valuation processes are essential. The strongest governance structures generally had clear separation of responsibilities, robust valuation practices and documented evidence showing how they had considered different investor interests throughout the transaction. 

• Investor alignment: Stronger firms’ arrangements showed clear alignment between manager and investor interests through General Partner commitments, governance controls and oversight of commercial incentives.

• Investor fairness: Most-favoured-nation (MFN) clauses and side letters: Stronger approaches treated MFNs clauses and side letters as part of wider investor fairness frameworks supported by governance and compliance oversight - rather than as purely contractual arrangements.

• Disclosures: The FCA's central message on disclosure is that it is a supplement, not a substitute. Stronger firms prioritised avoiding, mitigating or managing conflicts before considering disclosure, and engaged investors and LPACs early enough to provide "meaningful challenge" before decisions were made. Disclosure was often proactive and timely.

• Managing conflicts throughout the investment lifecycle: The FCA expects firms to identify conflicts early, provide effective oversight and challenge, demonstrate investor fairness and adapt governance frameworks as business complexity increases.

Next steps

The FCA expects firms to consider the findings and identify any gaps in their approach to identifying, assessing and managing conflicts of interest. In practice, that means:

• Running a documented gap analysis against the FCA's findings and its stated expectations, not treating this as a desktop exercise but revisiting it as the business, ownership structure or product range changes, to ensure their conflicts frameworks, governance arrangements and controls remain proportionate to the nature, scale and complexity of their activities and they continue to support fair investor outcomes.

• Testing whether the UK conflicts framework reflects the substance of UK activities - not just the firm's permissions profile - particularly where investment decisions are formally attributed to an overseas entity.

• Reviewing the independence of second-line compliance from any "control room" function involved in deal-level decision-making, and considering whether internal audit has a genuine role in reviewing the conflicts framework.

• Revisiting reliance on LPACs and investor consent as a conflicts-management tool, ensuring they operate alongside - not instead of - robust internal governance.

The FCA will be doing targeted follow-up work with firms and continue to engage with industry associations following the publication of the feedback.

In the accompanying press release, the FCA said it is also examining governance and conflicts concerns regarding the use of private credit to fund consumer litigation claims, including significant risks of harm to investors, consumers and markets.

The FCA’s ‘Conflicts of interest and fair customer treatment in private markets’ webpage, published on 23 October 2026, is available here.