New Year, Similar Concerns: The FCA's 2025 Priorities for UK Private Fund Managers

On 26 February 2025, the Financial Conduct Authority (FCA) published a portfolio letter (Letter) explaining its supervision priorities for the asset management and alternatives portfolios.

The Letter outlines the FCA’s updated supervisory strategy and priorities for alternative investment managers, such as private fund managers, and addresses three main priorities:

• Supporting confident investing in private markets, noting, in particular, the valuation of private fund assets and management of conflicts of interests
• Building firm and financial system resilience against market disruption, noting, in particular, stress testing and contingency planning, liquidity management, and operational resilience
• Securing positive outcomes for consumers, noting, in particular retail investor access and, where relevant, the Consumer Duty

The Letter also identifies two areas of “targeted work”:

• Sustainable finance
• Financial crime and market abuse

The priorities remain similar to those set out in recent letters, including the letter sent in 2022, which we covered in our alert Back to Work: The FCA'S 2022-23 Priorities for Private Fund Managers | Insights & Resources | Goodwin. The steps that managers will be required to consider and, where necessary, address the points raised in the Letter take should, therefore, be a continuation of current work rather than something entirely new.

However, the FCA makes the point that its supervisory work and the priorities set out in the Letter complements its wider policy work, and particularly its work to support growth. The extent to which these priorities will be adapted and, if necessary, yield to the need for growth, noting that the disproportionate application of FCA rules can hinder new or expanding business, is yet to be seen.

What the FCA Expects Managers To Do

In identifying the areas where the FCA believes managers can improve, the Letter makes it clear that the FCA will expect:

• Manager CEO’s to discuss the Letter with their board/executive committee; and
• Managers to consider (i) which of the risks identified in the Letter apply to them, (ii) whether they have the appropriate strategies in place to address those risks, and (iii) what actions are necessary to mitigate those risks to ensure that the managers meet the FCA’s requirements.

As with the past letters it has sent to CEOs, the FCA acknowledges that the Letter is addressed to a large and diverse group of managers and that not all issues raised will be relevant. In considering the extent to which a manager is expected to comply, the nature, scale and complexity of the manager’s business is also relevant.

Irrespective of the extent to which managers has addressed the points in the Letter, it will need to include the Letter as an agenda item at the next board or relevant committee meeting at which compliance issues are scheduled for discussion.

1. Private Markets

The main focus of this priority is the valuation of private fund assets and the management of conflicts of interest. In examining there processes and practices in these two areas, managers should look closely at the FCA’s concerns in the Letter and make any necessary updates and adjustments to address them as necessary.

FCA highlights the fact that, without the frequent trading and regular price discovery present in more liquid public markets, managers must estimate private asset values using judgement-based approaches to meet applicable accounting standards.

The FCA identifies the risk that managers could value private assets inappropriately, for example through poorly managed conflicts of interest or insufficient expertise. Investors need fair and appropriate valuations to make informed decisions and understand how their investments perform. Where managers use valuations to price transactions, this may affect fairness between buyers, sellers, and remaining investors. Where managers use valuations to calculate fees, there is a risk of managers inappropriately charging investors.

The FCA points to its imminent Review on Private Market Valuation Practices. When this is released, it expects managers to consider the report’s findings to ensure their valuation processes are robust, with a strong governance framework and audit trail. The FCA also expect boards and valuation committees to be given regular, sufficient information on valuations to ensure effective oversight.

2. Market Integrity and Disruption

The FCA points to the The Bank of England's system-wide exploratory scenario exercise final report | Bank of England that it published with the Bank of England (SWES Report). The SWES Report noted enhanced resilience in the asset management sector but also found some persistent risks and vulnerabilities in the system. Actions by non-bank financial institutions, like rapid asset sales, amplified the impact of the initial scenario shock.

For the FCA, the SWES Report provides valuable insights for managers to help improve their risk management practices. This includes consideration of system wide dynamics for stress testing and contingency planning. Informed by the vulnerabilities identified in the SWES report, the FCA states that it will focus surveillance on prudent risk management, liquidity management and operational resilience.

The FCA also notes its continued monitoring of liquidity risk and ensure that the recommendations in CR/06/2024 Revised Recommendations for Liquidity Risk Management for Collective Investment Schemes - Guidance Document are in place across its systems. Of more interest for hedge and credit fund managers, the FCA states that it will consider findings on margin preparedness from both the SWES Report and the Financial Stability Board’s Liquidity Preparedness for Margin and Collateral Calls: Final report and discuss actions with managers. Finally, the FCA states that it will continue its data-led approach to identifying outlier managers and funds to seek assurances about risk management. It will focus particularly on those with high leverage, illiquidity, or concentrated investment strategies.

The FCA uses this section to highlight operational resilience and collateral management practices, including managers’ oversight of third parties where services are outsourced.

3. Consumer Outcomes

The FCA’s focus here is mainly on the typical retail products and services of exchange traded funds and managed portfolio services, which will be of little relevance to a typical private fund manager. That said, the FCA does remind managers about the Consumer Duty (the Duty) and does address retail investor access to private assets, albeit that it covers this under the Private Markets priority above. Managers who are considering ways to increase the distribution of their funds to investors that are classified as retail investors should consider the FCA comments on these points.

The FCA notes that since the Duty came into force, managers have made significant efforts to implement and embed it into their business practices. The FCA will expect managers to continue to develop their monitoring capabilities to assure themselves they are delivering good consumer outcomes.

Noting that, discussion of consumer outcomes tends to be retail investor focussed and the Duty is only relevant to retail investors, managers should note that the FCA deals access to retail investors. Here the FCA with also points to increasing opportunities for retail investors to invest in private assets with the “innovative retail product development” that is underway. The FCA highlights the need for managers to carefully consider if their product development frameworks remain fit for purpose for the more complex risk landscape in which private assets sit. They are actively addressing the challenges to ensure investors have the right information about private market products. To meet Consumer Duty expectations, many managers are taking additional steps to understand distribution chains to retail clients and taking steps to deliver good outcomes for their products’ end-investors. The FCA states that it will continue to supervise these issues to support the sector’s transition to retail offers of private market products.

We should note that, although the Letter, unlike earlier letters, does not expressly address the point, managers should remind themselves that, even if they do not target retail investors, the FCA will continue to expect:

• Managers to have a due diligence process connected with client categorisation that prevents investors with a lower risk appetite from gaining access to (high risk) investments that do not match their objectives.
• Managers that onboard retail or elective professional to review their processes to ensure they are effective, including the procedures for checking that elective professional investors meet the quantitative and qualitative tests in the COBS 3.5 section of the FCA rules.

4. Targeted Work – Sustainable Finance

The FCA’s comments here will be relevant to those UK managers who manage or market ESG funds and the more important FCA rules are aimed at UK funds marketed to retail investors so the FCA comments here may be of limited importance for most private managers. That said, sustainable finance and the proper governance around ensuring that funds marketed as ESG compliant, in fact, make ESG compliant investments, remain important for the FCA generally. Managers of ESG funds, wherever they may be established, should, therefore, take note of the FCA’s concerns.

The FCA notes the introduction of its Sustainability Disclosure Requirements (SDR) and Investment Labels regime, with the anti-greenwashing rule, aims to build trust in the market and ensure that products that are marketed as sustainable do as they claim, with the evidence to back up these claims.

The FCA states that it will engage with managers with sustainability-related products, to understand how they are implementing the labelling, naming, and marketing rules. This will allow it to identify any outliers and engage with them

5. Targeted Work - Financial Crime and Market Abuse

As is the case with conflicts of interest, the FCA’s comments on market abuse are a reminder of the importance the FCA attaches to mitigating the risk of financial crime, including fraud, money laundering, terrorist financing and bribery and corruption, and market abuse and ensure compliance with the UK Market Abuse Regulation. The FCA notes, in particular, complex ownership structures.

The FCA refers to appropriate and proportionate systems and controls are key mitigants to this risk, and effective oversight is crucial where controls are outsourced. Proportionate and risk-based due diligence on investors and robust Know Your Client checks are particularly important to identify ultimate beneficial owners.

Please contact your Goodwin contact or any of the contacts below should you want to discuss any of the matters raised in this briefing.

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.