The UK’s watchdog has initiated an investigation into private asset managers to address potential conflicts of interest within the industry. This move comes as part of a broader regulatory effort to ensure transparency and protect investor interests. The Financial Conduct Authority (FCA) has expressed concerns about practices that may not be aligning with the best interests of clients.
This includes the possibility of asset managers prioritizing certain clients over others or engaging in activities that could undermine their fiduciary duties. The probe will focus on identifying and assessing conflicts of interest, ensuring that asset managers have adequate measures in place to manage and mitigate these risks. This initiative aims to enhance trust in the financial system by holding private asset managers to higher standards of integrity and accountability.
Industry experts have welcomed the FCA’s actions, noting that increased scrutiny is essential for maintaining a fair and transparent market. This investigation underscores the importance of regulatory oversight in safeguarding the interests of investors and maintaining the overall health of the financial sector. Further details of the probe will be revealed in the coming months, as the FCA continues its efforts to ensure that private asset managers operate within the framework of fair and ethical business practices.
It is hard to pinpoint the exact date when model portfolios began to take hold as popular propositions for advisers. The Retail Distribution Review (RDR) had an impact, and the Markets in Financial Instruments Directive (Mifid) emphasised that. Given reports claiming an annual growth rate of over 10% in the past five years, with total assets approaching £300bn, other factors are clearly at play.
Cost is one of them, but so are optics – it must be hard for anyone to recommend a single fund and claim it needs a great deal of ongoing attention. It is unsurprising that the Financial Conduct Authority (FCA) has announced a review of the sector; in fact, it’s surprising it has taken this long to come to the top of the to-do list. The regulatory dilemma around model portfolios is that they are unregulated.
To the layman, they can look akin to a multi-asset fund, but there is no prospectus, no Depositary (acting quasi-regulatory), and no Corporate Director. The only real control surrounding the service includes brochureware produced by the manager, making it imperative that what is delivered matches what has been offered. Providing fair, clear, and not misleading information remains a vital requirement.
However, this doesn’t guarantee that the governance structure around funds will prevent any issues. The Woodford saga is a glaring recent example, but there are many other funds that have not turned out as expected.
FCA probes asset manager practices
In its ‘Dear CEO’ letter, the FCA did not provide great detail on the planned ‘multi-firm’ review, but it is safe to assume it will involve areas typical of assessments for authorised fund providers. These would include governance, risk management, adherence to limits, conflicts of interest, and assessments of value. Since Consumer Duty required such assessments to be carried out for all services generally, there have been numerous vague statements claiming services provided good value without much detail.
This lack of detail is inadequate, and it will likely be advisers who will have to monitor portfolios to ensure what they advised their clients to invest in is delivered. The primary responsibility is on the provider, but advisers will be the ones explaining to clients if things go wrong. This scrutiny is necessary and acknowledges that genuine pre-investment due diligence is extremely challenging.
Very few advice firms are in a position to conduct rigorous due diligence, and providers may struggle to service such demands. It is possible that extreme enforcement action could be taken, but there is no reason to expect this. It is hoped that examples of good and bad practices will be shared to provide guidance on regulatory expectations.
The FCA’s agenda suggests new rules may not be a priority, which would be welcome news. There is no doubt that model portfolios can provide good value for investors, but it is also true that some will not meet these standards. With market watchdogs taking a closer look at private asset pricing, general partners (GPs) managing semi-liquid funds are facing mounting challenges in valuation.
Private Equity International spoke with several fund managers to understand their methods and navigate the increasing regulatory scrutiny. According to industry experts, transparent and consistent valuation practices are becoming more critical as regulatory bodies demand higher standards of accuracy and accountability in private equity markets. This shift requires GPs to employ more sophisticated valuation techniques and to ensure they are in compliance with evolving financial regulations.
One GP noted, “The market is pushing us to be more stringent in our valuation practices. It’s not just about satisfying investors; it’s also about meeting regulatory expectations.”
With increased oversight, fund managers are also focusing on enhanced reporting standards to provide clearer insights into the value of their investments. This trend reflects a broader movement within the financial industry toward greater transparency and reliability in financial reporting.
As regulatory scrutiny rises, the need for specialized skills in valuation and compliance is becoming paramount. Funds are investing more in technology and expertise to meet these demands and maintain the trust of their investors and regulators alike.
Photo by; Sergey Zolkin on Unsplash