FCA publishes findings of review into smaller asset managers and alternatives business models

The FCA has published the findings of its review into business models for smaller asset managers and alternatives.

Following its Alternatives Supervisory Strategy from August 2022, the FCA has been focusing on smaller firms to identify models posing greater consumer harm risks. The FCA supervises nearly 1,000 firms in the asset management and alternatives sector with less than £1bn of assets under management. The review examined how relevant firms have been approaching three key areas:

High-risk investments (HRIs)

Rules around the promotion of HRIs – such as unregulated collective investment schemes, speculative illiquid securities and non-readily realisable securities – were strengthened in 2022; the FCA has since expected firms to have a clear understanding of the consumer journey for such investments.

The FCA noted that most firms offering HRIs could clearly categorise whether their products were restricted mass market investments (RMMIs) or non-mass market investments (NMMIs). However, some could not differentiate their products and the FCA warned that failure to understand the difference between categories of investments means that firms may be at risk of not complying with the marketing restrictions which look to protect more vulnerable investors.

Further, the FCA found instances of poor practice in financial promotions for HRIs – examples of firms having unclear risk warnings on websites or social media, an inability to explain likely investment returns, and incomplete investor cost disclosures. Targeting should be based on effective product governance and robust client assessment and categorisation processes. Firms should consider their approach to the promotion of HRIs in light of these warning notes.

Conflicts of interest

Small firms, by their nature, tend to have more consolidated business model arrangements. The FCA notes that staff will often find themselves taking on more than one role in the firm, potentially leading to conflicts of interest. Where one individual holds all senior management functions compliance with the ‘appropriate resources’ threshold condition should be considered. The FCA looked at whether firms were able to manage conflicts through effective governance and mitigation policies where conflicts cannot be avoided. The review found that, although most smaller firms did keep records of conflicts, many were not maintained properly and capabilities to identify all potential conflicts were sometimes missing.

The FCA suggests that firms should maintain an accurate record of conflicts early on and ensure that it is reviewed and updated by senior management and a compliance team. Policies and procedures should be tailored to the firm, and independent oversight should be used where needed.

Consumer Duty

Many firms displayed good progress in implementing the Consumer Duty into their business. In the context of smaller firms, the review reiterated that the Consumer Duty is proportionate in its application and what the FCA expects of firms will be based on what is reasonable considering its size, resources and activities.

The FCA emphasised that, although customers who elect to be treated as professional clients are not within the scope of the Consumer Duty as such, a firm that encourages a customer to seek that professional client classification so it can avoid giving the requisite extra protections would be in breach of the Consumer Duty. Adequate investor categorisation procedures are therefore essential for firms dealing with elective professional clients. 

Some firms did not have internal content setting out what good and bad outcomes could look like for investors. Some could also not provide evidence demonstrating any effective challenge from governing bodies and senior management on their Consumer Duty board reports. The FCA also identified specific concerns with unsuitable high-cost investment strategies where the associated risks were not adequately communicated, as well as retail investors being inappropriately onboarded to alternative investment funds. 

Next steps

The FCA intends to continue monitoring firm conduct on these topics, and added that the findings are not necessarily exclusive to those firms with under £1bn assets under management. 

Firms should remain focused on the FCA’s priorities from the Asset Management and Alternatives Portfolio Letter published in February 2025 – see our blog post here.

The FCA will also consider the findings in relation to its review of the AIFM Regulations – see our blog post here.

Please contact John Roberts if you would like to discuss any of the points arising from the FCA’s findings.

This article was written by Matthew Pegler and John Roberts.

We will continue to consider appropriate steps where we identify poor practice in firms that risks consumer harm, undermining the integrity of the market, which may deter future investment and harm economic growth.

https://www.fca.org.uk/publications/good-and-poor-practice/smaller-asset-managers-and-alternatives-business-model-review-our-findings