The asset and wealth management industry has become used to regular broadsides from regulatory authorities for practices ranging to how fees are set to conflicts of interest. Recent problems in the UK have caused concern.

Last week’s “Dear Chief Executive” letter from the Financial Conduct Authority to asset management firms about the potential threats the sector poses is a necessary wake-up call to an industry hit by a number of problems, the firm said.

The FCA said that general standards of governance don’t match its expectations; funds offered to UK retail investors do not issue good value and often do not identify or spell out conflicts of interest.

“The FCA’s Dear CEO this week might have come ‘out of the blue’ for many firms, but the concerns and priorities expressed would not have surprised many asset managers, particularly those involved in the Market Study and the Value Assessment,” Andrew Glessing, head of regulation at Alpha FMC, said. “The FCA is increasingly open about the fact it considers that governance and conflicts management need to improve to achieve the value it seeks for investors.”

The recent liquidation of a flagship fund run by UK investment manager Neil Woodford, and temporary closures of some property funds amid heavy withdrawals, have highlighted problems in parts of the UK asset management sector. Although the industry has been squeezed by low-fee exchange traded funds and new technologies, the FCA comments suggest that there is still excess fat. The warning also shows that while the wealth industry has had to digest a raft of rules such as new data protection regulations and the MiFID II regime to improve transparency and investor protection, there is still plenty left to do. The watchdog has fired off such "Dear CEO" missives before, in particular when it warned wealth managers about the suitability of certain investments a few years ago. The regulator has also fired a salvo at "robo-advisors" highlighting some risks it saw in this area. 

The FCA’s letter said that open-ended funds can have a liquidity mismatch between the terms at which investors can redeem and timescales needed to liquidate assets; on 30 September 2019 the regulator issued a policy statement on what happens with such funds when assets are illiquid.

“We expect you [CEOs] to take any necessary or appropriate action following these communications. We will continue our oversight of UK authorised funds. Where we identify potential liquidity issues in funds, including through our regular interaction with depositaries, we will ensure that AFMs take prompt action to mitigate or resolve them,” the regulator said.

“You should ensure that the boards of your regulated entities engage in robust discussion and challenge around important business decisions, without undue reliance on group structures. We also expect you to recognise and take steps to mitigate harm arising from any conflicts of interest between affiliates, most notably between the AFM entity and any delegate investment management entity,” it said.

In 2017 this news service interviewed the FCA about the financial services industry and some of its challenges, including its report of June that year on the asset management sector.