Sentinel Regulatory Services news & information

On 8th May 2025, the FCA published its findings resulting from its review of smaller asset management firms. The review, part of the FCA’s 2022 Alternatives supervision strategy, sought to identify smaller firm business models posing increased risks of harm to consumers. Although, the FCA is clear that some of the findings may also apply to larger firms and other investment firms.

The FCA’s 5-year strategy (discussed by Sentinel here), set out the FCA’s plan to have more ‘direct contact points’ with a higher proportion of firms. Interestingly, the FCA surveyed 40% of the smaller firm population – a total of 410 firms – with 196 firms alone surveyed in September 2024, which suggests an early implementation of this strategy. The FCA also indicated that it will issue further tranches of its questionnaire.

As a result, regardless of their size, firms should prepare themselves accordingly. Governing bodies should review the report to identify and manage their key risks of harm, with a view to ensuring the delivery of good outcomes for consumers and to support confident investing and economic growth across the investment industry.

Key findings

The FCA’s review focused on 3 key areas:

1.      High-risk investments,

2.      Conflicts of Interest, and

3.      Consumer Duty.

Whilst many firms were compliant, some of the weaknesses identified include:

1.      High-risk investments

The FCA note that some firms did not:

·       understand the difference between a ‘Non-Mass Market Investment’, such as an unauthorised fund, and a ‘Restricted Mass-Market Investment’, such as an unlisted equity

·       understand retail categorisations such as high-net worth or sophisticated investors

·       have appropriate risk warnings and were unable to explain likely investment returns

·       have adequate systems and controls around their appropriateness tests and preliminary assessments of suitability

Another notable area of the review, which will also be of relevance to the wider industry, and not only those who promote high-risk investments, are the findings relating to the client categorisation process for opting up retail clients to elective professional client (EPC) status. This is an issue that we have often seen firms struggle with. The FCA expects firms to review their processes and procedures and expects firms to:

·       use structured assessments to evaluate EPC criteria

·       clearly document all testing, risk warnings and declarations prior to onboarding

·       Implement post-onboarding processes to ensure they meet their obligations should they need to (further to COBS 3.5.9R) re-categorise investors or clients as retail clients and send relevant notifications of their new categorisation status.

2.      Conflicts of interest

The FCA noted that some firms did not:

·       maintain an up-to-date and accurate conflicts register

·       have adequate systems and controls to identify conflicts

·       think about potential conflicts where senior staff held overlapping roles

·       have tailored conflicts of interest policies and procedures

·       always disclose to investors where a conflict could not be avoided

3.      Consumer duty

The FCA noted that some firms did not:

·       consider the application of the Duty and, where it applied, had not revised their processes. This is particularly relevant for product manufacturers who, whilst they may not have any ‘direct’ retail clients, still need to consider their responsibility in the distribution chain

·       provide meaningful consumer duty board reports and could not provide evidence demonstrating effective challenge from senior management on the reports

·       offer suitable investment strategies

·       provide supporting analysis or evidence that their products delivered fair value. Firms should ensure they have completed appropriate fair value assessments

Next steps

Firms should review the FCA’s findings at board and senior management level. Where relevant, internal controls, governance arrangements, and compliance procedures should be assessed and, where necessary, enhanced to align with the FCA’s expectations. The regulator has made clear that it will continue to monitor these areas and may take further action where it identifies significant shortcomings.