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FCA sets out its asset management supervisory strategy

At a glance

The FCA has published a Dear CEO letter setting out its asset management supervisory strategy. The FCA’s key priorities are

  • Product governance: This includes product design, distribution strategy, customer communications and assessment of value. The FCA will have a particular focus on assessment of value. We set out insights on the Consumer Duty and assessment of value here, here and here.
  • ESG and sustainable investing: The FCA’s supervisory activity will focus on how governance structures oversee ESG product development, integration of ESG into the investment process, the use of third-party and proprietary information and the viability of sustainability-related claims. We set out insights on this topic here, here, here and here.
  • Product liquidity management: The FCA wants firms to use liquidity management tools correctly and consistently, to ensure that different investors are treated fairly, and to ensure that their operational systems and processes are fit for purpose. We set out insights on this topic here and here.
  • Investment in operations and resilience: Firms need to understand the operational health of their business and be able to respond in a timely manner, manage the risks associated with third-party providers effectively, and report operational incidents to the FCA. We set out insights on this topic here, here and here.
  • Financial resilience: Firms need to ensure they have sufficient capital and liquidity to address harms from on-going operations and conduct an orderly wind-down, and to ensure that their governance processes allow them to assess their prudential health regularly and adequately. We set out further insights on this topic here.


The FCA has published a Dear CEO letter setting out its asset management supervisory strategy. The FCA’s key priorities are product governance, ESG and sustainable investing, product liquidity management, investment in operations and resilience, and financial resilience. Underpinning these, the FCA emphasises the importance of good governance, including governing bodies being composed of members with sufficient expertise, who receive timely and appropriate management information about risk, and who effectively oversee issues within the firm. The FCA says that in this regulatory cycle, it will focus on assessing the effectiveness of firms’ governance in identifying, considering, and mitigating harms.

Product governance

The FCA states that a key risk for the sector is that the quality and value of product offerings, or the quality of communications with customers, do not deliver good outcomes for consumers or meet their needs. This could be for a range of reasons, including because the product carries excessive costs and charges, is not designed with the target audience in mind, or is distributed to the wrong type of investor. A key priority for the FCA is implementing the Consumer Duty (“the Duty”).

The FCA will follow up on its 2021 Assessment of Value review findings and seek to identify outliers, for example where firms do not apply all the minimum considerations, assess value at fund level rather than unit class, or where fund performance is assessed using measures that do not reflect a fund’s investment policy and strategy. It will also consider in this review how firms have built maturity of ESG into value assessment considerations. The FCA will also conduct a review of the embeddedness of the Duty in 2024, with a focus on the price and value outcome.

As set out in our blog on value assessments, it is important for firms to assess value in the context of each fund’s purpose, to carry out the assessment at a sufficiently granular level, and to give sufficient weight to all value indicators. The Duty’s value assessment rules are less prescriptive than the existing rules for authorised fund managers (AFMs), but we think that firms will nevertheless need to carry out a sufficiently robust assessment.

Where firms manage ESG funds, we think that the FCA will expect them to be able to demonstrate that any premium charged for this service is justified by the value added by positive impacts on E, S and G issues as per the fund’s strategy. The FCA’s proposed Sustainability Disclosures Requirement (SDR) rules have a particular focus on “credible” and “measurable” objectives, and evidence-based KPIs (see our blog). Loosely defined objectives and lack of quantifiable KPIs are likely to create challenges for demonstrating value.

Firms reviewing their product governance processes should take note of the shortcomings previously highlighted by the FCA, and also consider new requirements under the Duty, including preventing foreseeable harm, and considering customer vulnerability and behavioural biases. To ensure that customers understand the products they buy, customer communications should be tested across different groups within the target market, including those with varying risk appetites, educational backgrounds, and characteristics of vulnerability. And when setting their distribution strategy, asset managers should consider their target market, overall value for the end customer, and whether sales processes facilitate customer understanding. More insights on how asset managers should prepare for the Duty are set out here and here.

ESG and sustainable investing

The FCA is concerned that some claims about ESG and sustainable investing are misleading or inaccurate. In July 2021 the FCA published a Dear Chair letter for AFMs, setting out guiding principles on how transparency can be achieved in the design, delivery and disclosure of ESG funds. The FCA is due to publish a review of some firms’ practices in this regard. With transparency being an ongoing concern, the FCA is due to publish its final SDR rules (labels and disclosures) in June 2023 (see our blog on the SDR consultation). In the first half of 2023, in-scope asset managers will also publish their TCFD disclosures. The FCA’s supervisory activity will focus on how governance structures oversee ESG product development, integration of ESG into the investment process, the use of third party and proprietary information and the viability of sustainability-related claims.

In our view, greenwashing can manifest at several different stages of a customer’s journey with an asset manager, including the pre-contractual phase and during ongoing performance monitoring (see our paper). Firms will therefore need to ensure there is consistent understanding across the Board, front office staff, risk, compliance and operations functions on what greenwashing means for the firm in context of its products, the drivers of risk and processes for preventing the risk. It is also important for asset managers to integrate ESG into their risk management frameworks effectively (see our blog).

Furthermore, due to the FCA’s concerns around lack of transparency in the methodology used by ESG ratings providers (see here), it will consult in Q1 2023 on bringing ESG ratings providers into the regulatory perimeter. The FCA has also convened a Data and Ratings Code of Conduct Working Group (DRWG) to determine good practice for ESG ratings providers. In our view, asset managers should avoid over-reliance on individual third-party providers and perform due diligence to understand how data was obtained and which metrics are being weighed in specific ESG ratings. We also think that where firms are creating proprietary ESG ratings, they should be prepared to explain the methodology to the FCA and why and how proxies were used to plug data gaps.

The FCA encourages firms to assess how they have taken into account net zero commitments in their transition planning. Risk and compliance functions at asset managers can play a key role in facilitating their net zero transitions by ensuring plans are credible, routinely assessing progress, cascading regulatory knowledge through the firm and incorporating climate risk into risk frameworks (see our joint paper with the Investment Association). And in order for firms’ governance and culture to support the net zero transition, firms need to ensure they have aligned priorities, identified responsibilities clearly, transformed cultures and plugged educational gaps (see our blog).

Product liquidity management

The FCA is concerned that while firms have tools available to improve the quality of their liquidity risk management, they may not always oversee them correctly or use them consistently. Firms should ensure exiting and remaining investors are treated fairly when considering the costs of redemption, and the mix of assets which may be employed to meet redemption requests. They should work with stakeholders to ensure that operational systems and processes are fit for purpose, can be executed at pace, and can be scaled to handle additional demand when needed.

The FCA notes that it is working with the Bank of England (BoE), and other regulators internationally, to strengthen resilience of money market funds, funds with significant liquidity mismatches, and transmission of risk from the non-bank financial sector to the wider market. It is also in the process of completing a liquidity management multi-firm review.

In our view, it is important for firms to consider a wide range of scenarios when performing liquidity stress testing. Following a turbulent 2022, the FCA has said that “what may be considered ‘extreme but plausible’ now includes a wider horizon of events than may have been the case in the recent past”.

Regulators have been encouraging asset managers to use swing pricing and other anti-dilution tools to ensure that redemption costs are allocated fairly between exiting and remaining investors. Both the Financial Stability Board (FSB) and UK regulators have said that anti-dilution tools should consider both explicit and implicit transaction costs. However, as we set out in our blog, this can be challenging, especially in illiquid markets or in stressed market conditions. In some cases, firms may need to consider alternative measures, such as limiting the frequency of redemptions. It is also important that firms use an appropriate mix of assets to meet redemptions, so that the risk profile of the fund is maintained.

In terms of operational systems and processes, we think it is important that firms have appropriate escalation procedures, test their contingency plans periodically, and that control functions are sufficiently involved in reviews of the liquidity risk management process. Where third parties could be called upon to provide additional liquidity (such as in the case of an LDI fund), we suggest firms carry out joint testing.

The BoE said that it will develop stress testing to understand better the resilience of non-bank financial institutions, and will set out further details in the first half of this year. We think asset managers are likely to receive data requests about their potential losses and liquidity demands arising from leverage and how these could be met by available liquidity.

The FSB has proposed wide-ranging reforms to money market funds. The UK and EU have both started policy work in this area but so far it has been slow-moving. MMFs will want to consider how different reform proposals could affect their position in the market and how they can continue to remain attractive to investors, as well as the operational impacts of the proposals. In the meantime, they should ensure they carry out robust stress testing.

Investment in operations and resilience

The FCA notes that asset managers need to have appropriate measures to understand the operational health of their business and be able to respond in a timely manner. If they rely on third parties for services, they should ensure they have sufficient information, skills, and knowledge to make sure that third parties will continually deliver a service which allows them to meet their regulatory obligations. The FCA notes that the current level of incident reporting across the sector is variable. Over the cycle the FCA will complete a range of proactive programmes to monitor and test asset managers’ ability to meet these regulatory requirements. It may select firms for further review, including through using its cyber and operational resilience assessment tools and its intelligence-led penetration testing scheme (CBEST).

We set out how we think asset managers in scope of the UK’s operational resilience framework should use the transition period here. Firms will need to focus on building the resilience of their important business services (IBS) or functions by understanding the assets and processes that support their delivery, identifying key interconnections and vulnerabilities, and developing performance indicators to detect threats/incidents. To be successful, they will need to embed operational resilience within their operating models and turn it into a key driving factor for Board and senior management decision-making. In our view, firms should also consider the adoption of integrated tools to manage the process so that they have a single interface for operational resilience and can monitor IBS in real time.

In our experience, it is important for firms to consider a wide range of scenarios in their resilience testing, including market-driven scenarios such as the LDI crisis. And feedback from supervisors has also been that firms need to consider sufficiently severe scenarios, including scenarios where multiple things go wrong.

Where firms rely on third party providers, we think they should ensure reciprocal alignment in areas such as IBS and impact tolerances where the third party is also subject to the rules, and carry out joint testing where possible. However, getting adequate information from third parties has been challenging for many firms. Given that third-party services received by asset managers are sometimes quite standardised, there may be the potential to develop shared assessment mechanisms (including pooled audits and pooled testing) where appropriate. Asset managers also need to develop the ability to assess third party concentration risk, which may require access to more market intelligence and data, and where third-party dependencies are concentrated, they may consider opportunities to diversify.

Some firms that are not in scope of the UK’s operational resilience regime are choosing to apply some of the requirements anyway, given the business importance of operational resilience. Firms with EU operations will also need to prepare to comply with the DORA by January 2025 (see our blog). We set out further insights on what firms should focus on in terms of operational resilience here.

Financial resilience

Under the Investment Firms Prudential Regime (IFPR), the FCA expects firms to hold sufficient capital and liquidity to address harms from on-going operations and conduct an orderly wind-down, and to ensure that their governance processes allow them to assess their prudential health regularly and adequately. The FCA has already been conducting SREPs and will continue to assess firms' prudential health using internal and external data sources and (where necessary) targeted monitoring visits. It will publish a report on firms’ implementation of the IFPR in the first half of 2023.

As set out in our blog, the first assessment of firms’ Internal Capital Adequacy and Risk Assessment (ICARA) requirements reveals that many firms have had to improve their processes to ensure effective consideration of all relevant risk and harms. This often included, for instance, a more detailed assessment of their business model, key activities and forward-looking business plan. Group considerations are another key area where additional assessment work has been required, including the rationale for a group approach. As concerns the corresponding SREP, areas of improvement included those pertaining to risk indicators, severity of stress testing, and wind-down processes.

Data quality and the accuracy of regulatory reporting also continue to be focus areas for the FCA, and firms need to ensure that information across their FCA returns, Public Disclosures, published financial statements and ICARA document is accurate and consistent.

From our exchanges with the sector, we now expect firms to embed IFPR-related processes within their business in the following areas in order to yield synergies and efficiencies: governance, strategic and risk management arrangements; overlaps between ICARA procedures and operational resilience standards; and ESG risk assessments.


While the issues set out in the FCA’s supervisory strategy are not new, this letter provides useful insight into the FCA’s current priorities and what actions the FCA expects firms to take on them. Asset managers will need to be able to demonstrate that they have robust processes and controls in these areas, underpinned by effective governance.