September 28, 2020

Volume X, Number 272

September 28, 2020

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September 25, 2020

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FCA Publishes Dear CEO Letter for UK Alternative Investment Firms

On January 20, the Financial Conduct Authority (FCA) published a letter to the CEOs of UK-based alternative investment firms to outline the FCA’s view of the key risks of harm to the customers or markets in which such firms operate (the Letter). The FCA defines alternative investment firms as firms that predominately manage alternative investment vehicles (such as hedge funds or private equity vehicles), or manage alternative assets directly, or provide advice on such vehicles or assets.

In the Letter, the FCA outlined the following supervisory priorities:

  • Investor exposure to inappropriate products or levels or investment risk: The FCA intends to review retail investor exposure to alternative investment products, to ensure that firms are aware of who their customers are and that they are exposed to an appropriate amount of risk. (This may be a response to recent concerns about the promotion of mini-bonds to retail investors, which resulted in this temporary product intervention in November 2019);

  • Client money and custody asset controls: Regarding the Client Assets Sourcebook (CASS), the FCA intends to review whether firms that have permission to hold client money and safeguard custody assets are doing so in a robust and CASS-compliant manner;

  • Market abuse: The FCA noted that, despite recent work on market abuse controls (see, for example, this Primary Market Bulletin), there is still “significant scope for improvement,” and therefore that more work may be conducted in the future;

  • Market integrity and disruption: The FCA noted that alternative investment firms may adopt “very high-risk investment strategies,” such as strategies with “significant leverage.” If so, their risk management controls need to be “robust” enough to avoid “excessive risk-taking” and to mitigate “harm or disruption to financial markets;”

  • Anti-money laundering and anti-bribery and corruption: The FCA is concerned that firms do not have “appropriate and proportionate systems and controls” to mitigate the risk that might “facilitate financial crime.” Therefore the FCA intends to review the systems and controls of firms in this portfolio; and

  • EU withdrawal: In the Letter, the FCA drew attention to their updated Brexit webpages (available here), and noted that firms should be preparing for the end of the implementation period, which is expected to be on January 1, 2021.

The Letter is available here.

©2020 Katten Muchin Rosenman LLPNational Law Review, Volume X, Number 24


About this Author

John Ahern, Financial Attorney, London, Katten Law Firm

John Ahern, partner at Katten Muchin Rosenman UK LLP and head of the London Financial Services group, focuses his practice on banking, financial services, UK and European financial markets, and related regulations. His background in private practice and as in-house counsel at a global investment bank provides him with perspective on the unique regulatory issues facing the wholesale and private banking sectors. John advises multilateral trading facilities, broker-dealers and banks on trading, clearing and settlement as well as custody of securities—both physical and...

+44 (0) 20 7770 5253
Carolyn H. Jackson, International Attorney, Katten Muchin law firm

Carolyn Jackson is a partner in Katten Muchin Rosenman UK LLP and is a Registered Foreign Lawyer. She provides US financial regulatory legal advice to a broad range of market participants, including commercial banks, investment banks, investment managers, broker-dealers, electronic trading platforms, clearinghouses, trade associations and over-the-counter derivatives service providers.

Carolyn guides clients in the structuring and offering of complex securities, commodities and derivatives transactions and in complying with US securities and commodities laws and regulations. 

+44 0 20 7776 7625
Nathaniel Lalone, Katten Muchin Law Firm, Financial Institutions Attorney
Senior Associate

Nathaniel Lalone, a partner at Katten Muchin Rosenman UK LLP, has a broad range of experience in the regulation of financial products and financial markets, and frequently provides regulatory and compliance advice to trading venues, clearing houses and buy-side firms active in the over-the-counter (OTC) derivatives, futures and securities markets. He is actively involved in advising clients on the implementation of MiFID 2 and MiFIR in the European Union as well as the international reach of US financial services regulation. He also has significant experience with structuring...

+44 0 20 7776 7629
Neil Robson, private equity fund managers counselor, Katten Law Firm, London

Neil Robson, a regulatory and compliance partner with Katten Muchin Rosenman LLP, focuses his practice on counseling hedge and private equity fund managers and other investment advisers on operational, regulatory and compliance issues. He regularly addresses Financial Conduct Authority (FCA) and EU authorization and compliance under both the EU Alternative Investment Fund Managers Directive (AIFM Directive) and MiFID, cross-border issues in the financial services sector, market abuse, anti-money laundering and regulatory capital requirements, formations and buyouts of...