On 9 August 2022, the UK Financial Conduct Authority (FCA) published a Dear CEO letter to alternative asset managers. The letter sets out the FCA’s Alternatives Supervisory Strategy and follows the FCA’s last Dear CEO letter from January 2020

The Dear CEO letter covers conflicts of interest, market integrity and disruption, market abuse, culture, and environmental, social, and governance (ESG) investments. In addition, the FCA has set out concerns that some hedge funds and private equity funds that have retail or “elective” professional investors are not adequately meeting their investor protection obligations.

As the FCA notes, the alternatives sector encompasses a large and diverse group of firms, and not all issues raised will be relevant to all firms.

The Dear CEO letter is consistent with commitments made in the FCA’s Business Plan 2022/23, namely:

(a) putting consumers’ needs first; 

(b) strengthening the UK’s position in global wholesale markets; and 

(c) promoting a strategy for positive change in the realm of ESG concerns.

Putting consumers’ needs first

  • Investment strategies that carry inappropriate levels of risk for their target client. While alternative firms mostly deal with professional investors, many firms do have relationships with retail or elective professional investors. Under the UK and EU MiFID rules, and under the UK’s financial promotion rules, individuals are treated as retail clients (or retail investors) by default. Unlike accredited investor thresholds in jurisdictions such as the U.S., the UK, and the EU, MiFID rules require individuals to possess adequate knowledge and experience as well as sufficient net assets. As such, even high net worth individuals may be unable to elect to be treated as professional investors.

The FCA highlights that alternative firms have a different risk profile from a regulatory perspective, including the risk that investors are misclassified and subsequently denied appropriate protections. Reflecting concerns previously addressed in the 2020 Dear CEO letter, the FCA notes that inappropriate distribution and marketing practices by firms targeting mainstream investors continue.

To reduce the risk to consumers with limited investment knowledge or risk appetite of being exposed to inappropriate investment strategies, alternative managers must conduct thorough investor assessments when classifying investors. Accordingly, firms that onboard retail or elective professional customers should review their processes to ensure they are effective, including the procedures for checking that elective professional investors meet the quantitative and qualitative tests required under the FCA Rules (for alternative investment funds (AIFs), these are under Chapter 4.12 of the FCA Conduct of Business Sourcebook (COBS 4.12)).

The FCA notes that firms are expected to familiarise themselves with the new rules set out in the FCA’s recent policy statement PS22/10 (discussed in our August 2022 Investment Managers Update), requiring firms approving and issuing marketing to have appropriate expertise, and firms marketing some types of high-risk investments to conduct better checks to ensure that consumers and their investments are well matched. Firms should amend business practices where necessary to meet the FCA’s expectations.

The FCA will soon issue a questionnaire to all alternative portfolio firms to gather information on their business models, products, investor categorisations, and associated control framework. 

  • Conflicts of interest. The FCA notes that conflicts that lead to investor detriment include situations where firms have bypassed internal processes in pursuit of gains (sales, or an increase of assets under management). The FCA has identified this as a harm to investors and consequently will (a) assess the role played by inadequate management in causing such conflicts and (b) consider whether regulatory enforcement action is appropriate.

Firms will be expected to consider their shareholder structure and whether this has potential implications on their effective governance.

Strengthening the UK’s position in global wholesale markets

  • Market integrity and disruption. Firms, especially those that use high leverage or expose investors to high levels of risk, are expected to ensure that risk management systems, controls, and resources are suitable. Firms should ensure that risk functions are appropriately “resourced, contemporaneous, and commensurate with the levels of portfolio and business risk being taken.”

Particular flags include markets overestimating liquidity in the context of stressed markets, or leveraged structures coming under pressure. 

  • Market abuse. The FCA continues to focus on market abuse controls across the sector, noting these need improvement. It is expected that firms have robust prevention cultures, systems, and controls to ensure compliance with the UK Market Abuse Regulation. In particular, firms must ensure that these controls are tailored to their individual business models. Non-compliance may lead to criminal, civil, or supervisor sanctions.
  • Culture. The FCA believes a firm’s corporate culture is indicative of its business practices. For example, remuneration policies can ensure appropriate outcomes as, if employees are not incentivised due to a poor policy, there may be an increase in conflicts of interest and the potential for harm to customers and/or investors.

Firms subject to the MIFIDPRU Remuneration Code must apply the relevant rules from the performance period on or after 1 January 2022.

Diversity and inclusion are important features of a healthy corporate culture, and steps to promote these features are encouraged. The FCA plans to produce a Consultation Paper in late 2022 on the issue.


  • The FCA notes the recent increase in the number of AIFs that have an ESG focus. Such AIFs should ensure compliance with regulatory requirements on documents to be produced, such as ensuring that statements made about products are “clear and not misleading.”

Firms that are in-scope of the Task Force on Climate-Related Financial Disclosures should consider appropriate steps to ensure compliance with disclosure requirements from 2023, as required.