The Financial Conduct Authority has warned fund managers of alternative assets against “bypass[ing]” their own processes in order to grow sales and the number of assets on their books.
In a letter to chief executives today (August 9), the financial watchdog said “conflicts” such as these had led to investor detriment.
It also said firms need to ensure alternative investments are only offered to appropriate investor types, all the while noting the increase in environmental, social, and corporate governance (ESG) alternatives funds.
Alternative investments, which are largely made up of a mixture of private assets such as hedge funds or private equity funds, have become a major growth area for traditional asset managers.
In its letter, the regulator said: “We have seen situations where firms have bypassed their own processes to make sales or increase assets under management, these being examples of conflicts that lead to investor detriment.”
In addition, the watchdog noted that internal firm conflicts can also cause indirect harm to investors - such as dominant shareholders making material decisions independent of the firms' governance structure.
“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,” the FCA said.
“We would draw firms' attention to recent fines levied because of inadequate management of conflicts.
“Firm boards should carefully review their procedures to ensure conflicts are avoided, managed, or disclosed in a way that minimises harm to investors and markets.”
The alternative asset sector has been the subject of lucrative mergers and acquisitions of late. In May, Franklin Templeton agreed to buy Alcentra, one of Europe’s largest credit managers in a deal worth up to $700mn.
Private assets tend to command higher fees, securing investors’ capital for several years. Simultaneously, traditional 60/40 portfolios - which consist of equities and bonds - have begun to fall as asset managers look to alternatives.
The FCA’s renewed focus on alternative assets is therefore timely.
The regulator also cited its £9mn fine from March against GAM International Management Limited and its £230,000 fine against Timothy Haywood, the firm's former investment director.
Both fines were enacted after the regulator found the firm failed to adequately manage conflicts of interest.
Uptick in ESG alternatives
As well as listing examples of bad practice, the FCA’s letter to asset managers also noted a growth of ESG investments in the alternatives sector.
It cited increases in the number of Alternative Investment Fund registrations which have a stated focus on these themes.
“We recognise the importance of this dynamic and note the rapid pace of change as well as the challenges this presents to both industry participants and investors,” the FCA said.
“Firms should ensure that documentation of such products are clear, not misleading and that firms’ actions match the stated claims.”
