FCA sets sights on conflicts of interest
The Financial Conduct Authority (FCA) has published a portfolio letter, updating its supervisory strategy for the alternative asset management sector.
The FCA periodically reviews its supervisory strategy, and following the 2020 update it has issued a new letter, revising its guidance in light of its 2022 business plan commitments.
Alongside market integrity, market abuse, ESG, and consumer protection, the regulator has identified conflicts of interest as a key area of focus (COIs).
To protect investors, the FCA urges firms to review their procedures for the avoidance, management, and disclosure of COIs in order to minimise harm and potential risk exposure.
Additionally, they should analyse their shareholder structure and its possible implications for corporate governance.
According to the regulator, inadequate corporate governance can lead to market manipulation and erroneous fund performance reporting. In turn, this may cause poor outcomes for consumers and loss of market integrity.
Further, the FCA warns that bypassing internal processes, and internal conflicts such as dominant shareholders abusing their decision making powers, could cause harm to investors.
“Conflicts of interest, and decisions affected by them, are not always transparent and we cannot rely on normal market forces to manage them,” said the regulator. “Where we identify harm to investors, we will assess to what extent inadequate management of conflicts played a role and will consider the need for Enforcement action as appropriate.”
“We interpret this to be a concern about founders who might have, or be perceived to have, overweening interests which they might exercise inappropriately and this concern is also reflected in the FCA’s intention to consider the impact on a firm’s culture where its founder or other senior individuals occupy a dominant role,” commented law firm Travers Smith.