In February, the FCA published its latest 'Dear CEO' Letter to UK asset managers, setting out its supervisory strategy for 2023. The Letter, which supersedes the FCA's January 2020 letter, outlines the regulator’s view on the specific harms that asset management firms can pose to both consumers and markets, and how it intends to supervise the asset management portfolio in order to address these.
The Letter calls for asset managers to consider which risks, as identified by the FCA, apply to them, and to adopt strategies for mitigating them. These include ESG and sustainable investing, product governance, liquidity management, investment in operations and resilience, and financial resilience.
The FCA has found ineffective governance to be a root cause of some asset managers failing to mitigate material risks or progress towards better outcomes for their customers. It intends in this regulatory cycle to focus on assessing the effectiveness of firms’ governance in identifying, considering and mitigating harms, and will focus attention on ‘outlier’ firms who are involved in ongoing FCA investigations or who have been identified in past supervisory activities.
The Letter comes in the context of a meaningful shift in the FCA’s expectations around the protection of retail customers, heralded by its new Consumer Duty, which will come into force for new products and services, and existing products and services open to sale or renewal, from July this year.
ESG and sustainable investing
Focusing on ESG and sustainable investing, asset managers should be mindful of the following:
- The FCA remains focused on greenwashing risks and assessing whether firms deliver on claims made in their communications with investors. When claims about ESG and sustainable investing are misleading or inaccurate, this may adversely impact consumer confidence to invest, as well as undermine the allocation of capital intended for delivery to environmental and social outcomes.
- The FCA will shortly publish a review of several firms’ implementation of ESG oversight practices, following its ‘Dear Chair’ Letter to authorised fund managers in 2021. Asset managers are expected to benchmark their own practices against the results.
- In H1 2023, in-scope asset managers will make their first TCFD-aligned disclosures and the FCA will publish its final decisions on the proposals in CP 22/20. The FCA will use these new sources of information and applicable rules when considering firms’ conduct in relation to ESG products.
- Firms should consider outlining the extent to which net zero commitments have been considered in transition planning.
The inclusion of ESG and sustainability as one of the FCA’s five supervisory priorities for asset managers is not unexpected. It reflects the key role the FCA sees for the UK’s financial sector and its regulators in supporting a more sustainable future, and forms part of a series of publications reflecting the FCA’s ongoing commitment to addressing climate change and accelerating the transition to a net-zero economy.
These include the FCA’s consultation on sustainability disclosure requirements and investment labelling rules (CP22/20) unveiled last year, and two more recent discussion papers on sustainability-related governance, incentives and competence in FCA-regulated firms (DP23/1) and on improving the regulation of UK asset management (DP23/2).
Since developments in governance for financial institutions tend to influence best practice in the economy more generally, the corporate world will likely be watching with interest to see what ESG-related oversight emerges from the FCA’s consultation and discussion papers.
To prepare for any future supervisory engagement, the FCA cautions firms that governing bodies and senior managers must ensure they have sufficient expertise to understand the level of exposure a firm may have to the risks identified in the Letter, and that where necessary, plans are implemented for alleviating them.