Despite a ban on mass-marketing of speculative investments to retail clients, the FCA remains concerned by the “inappropriate distribution and marketing practices” of some firms towards mainstream investors.

This is not a new area of concern for the regulator, but an area which continues to see “informal governance processes compounded by poor due diligence and inadequate investor categorisation.” Such oversight can often see instances of consumers saddled with products or investments that do not suit their individual needs, attitudes to risk or affordability.

Managing conflicts of interest is a foundational tenet in financial regulation and one that the FCA is keen to see demonstrated within alternative funds. Poor management of conflicts, the FCA notes, “can encourage market manipulation or improper fund performance reporting, in turn producing poor consumer

firms bypass their own processes to make sales or increase assets under management. Moreover, it has seen occasions where “dominant shareholders make material decisions independent of the firms governance structure.” Both of these scenarios see harmful conflicts which can lead to poor investment outcomes.

This is a clear indication that the FCA is moving away from only the ‘E’ in ESG and instead is turning towards all three pillars. Conflicts of interest and corporate accountability point towards an increasing focus on the ‘G’ – governance.

Alternative funds often carry significant or more turbulent investment risks. As such, the FCA says within the Dear CEO letter that it expects firms to have systems in place that are proportionate to the nature, scale and complexity of any associated risks. Where risk levels are higher, the FCA of course expects to see that firms have tailored their risk management systems to ensure they’re fit for purpose.

Instead, the FCA has “seen firms overestimate liquidity in the context of stressed or fast-moving markets” and fail to adapt when circumstances become more challenging. In situations of high stress, it is crucial that firms have a tight rein on their risk and liquidity management and are investing in technology and operationally resilient processes to assist these endeavours.

As above, the FCA is tackling the gamut of ESG, moving away from a primarily climate-risk focus and on  governance and social factors. Diversity and inclusion form an important part of both the ‘S’ (social) and ‘G’, with the overarching aim that financial organisations should represent their customers.

Over the last few years, the FCA has narrowed its focus on corporate culture, taking the view that a healthy culture is “critical for consumer protection and our ambition for well-functioning and world-leading markets”. Culture is all-encompassing and includes diversity and inclusion, how staff are incentivised and remunerated, all the way through to how comfortable individual employees feel in “speaking up”.

The FCA will be tightening its grip on culture in the coming months and looking for evidence of healthy cultures, and how senior managers and firms’ policies are acting to influence culture.

The FCA has seen a growth in both Authorised Funds that have stated an intent to utilise Environmental, Social and Governance (ESG) within their communications, as well as an increase in the number of Alternative Investment Fund registrations that have stated a focus on ESG.

The FCA – alongside other global regulators – is acutely aware of the issues surrounding ESG-labelled products. Specifically, it is concerned to ensure that any fund linked to ESG is actually an ESG-related product and not just labelled as such for saleability.

The regulator asks that firms “ensure that documentation of such products are clear, not misleading, and that firms’ actions match the stated claims”. In effect, the FCA is turning its focus to greenwashing and will be clamping down on greenwashing activity, following in the footsteps of its European counterparts.