Key Takeaways from the FCA’s Multi-Firm Review of Smaller Asset Managers and Alternatives Firms

On 8 May 2025, the United Kingdom Financial Conduct Authority (the FCA) released the findings from its multi-firm review aimed at smaller asset managers and alternatives firms.¹

The review was conducted across three phases in April 2023, November 2023 and September 2024, covering 410 firms, each managing assets under £1 billion. The review group represents approximately 40% of the smaller asset manager and alternatives population.

Whilst the review targeted smaller asset managers and alternatives firms, its findings will also be of relevance to larger asset managers and other firms.

Key Areas of Focus

The review focused on:

• Client communications, particularly concerning ‘High-risk investments’ (HRIs), which include interests in unregulated collective investment schemes, such as hedge funds or private equity funds.
• Conflicts of interest.
• The Consumer Duty.

We discuss each area in more detail below.

Client Communications For HRIs

The FCA’s review focused on how small alternative investment fund managers and other alternatives firms complied with the client communication requirements in Chapter 4 of the Conduct of Business Sourcebook (COBs) of the FCA Handbook when marketing HRIs.

The FCA’s Findings

The FCA concluded that most firms offering HRIs successfully categorised their products and had a clear understanding of their investor base. Firms had largely correctly identified any retail or elective professional clients (EPCs) among their investors.

However, the FCA identified that some firms lacked robust processes to ensure these investments were only sold to appropriate clients. The review also assessed the firms’ processes for undertaking the opt-up process, whereby a firm may treat a retail client, meeting certain qualitative and quantitative criteria, as an EPC upon request.

The FCA found some firms used qualitative assessments with a limited number of questions; unclear assessment and pass criteria; or overly simplistic, confirmatory questions when opting up EPCs.

While most firms sought formal client declaration and consent as part of their processes, it was not always clear what appropriate action a firm would take when it became aware that a client no longer fulfilled the conditions that formerly made them eligible for categorisation as an EPC.

The FCA reiterated its expectations that firms:

• Use structured assessments to evaluate EPC criteria.
• Clearly document all testing, risk warnings and declarations prior to onboarding.
• Have post onboarding processes in place to ensure they meet their obligations should they need to (further to section 3.5.9R of COBS) re-categorise investors or clients as retail clients and send relevant notifications of their new categorisation status.

Good Practice

The FCA outlines good practice for marketing communications concerning HRIs, including with respect to client categorisation and the EPC opting up process.

Below are key points of relevance for managers of hedge funds or private equity funds undertaking an opt-up assessment for EPCs:

• Establish clear procedures for product categorisation and proactively identify the target investor base, documenting how each aligns with the relevant regulatory classifications.
• Design and implement structured assessment frameworks for EPCs that include both qualitative and quantitative criteria, incorporate risk warnings, secure informed client consent, and trigger client status reviews at least annually or upon significant events (e.g. material changes in circumstances, notable investment losses, client requests or market developments).
• Develop robust EPC qualitative assessments by including open-ended, challenging questions with multiple possible answers that are specifically tailored to the fund’s strategy, complexity, risk profile and liquidity.
• Set high standards for EPC qualitative test performance by requiring a high pass threshold (up to 100%) and set different question for each relevant assessment.
• Conduct regular spot checks of completed EPC assessments to verify compliance, consistency and the continued effectiveness of internal controls.

Conflicts of Interest

The rules for managing conflicts (for example, in Chapter 10 of the Senior Management Arrangements, Systems and Controls Sourcebook of the FCA Handbook) require firms to take all reasonable steps to identify, prevent and manage conflicts that may arise in the course of their business.

The FCA’s Findings

While some firms demonstrated strong conflict management measures, the FCA identified that others fell short, especially where senior staff held multiple roles within their organisation.

These overlapping responsibilities often led to conflicts not being adequately identified, documented or disclosed.

Good Practice

The FCA outlines its expectations of good practice for firms with respect to management of conflict of interest, including that firms:

• Embed conflicts management into firm culture, with a clearly documented conflicts procedure and regular training in place to encourage staff to recognise and report potential conflicts.
• Identify potential conflicts early, then document and review them in a register detailing all identified conflicts, mitigation strategies and ongoing monitoring updates, including review frequency by compliance team and senior management.
• Implement clear, non-generic company policies and procedures tailored to the firm’s business model, stakeholders and investment strategies, and ensure fair and clear disclosures where conflicts cannot be avoided.
• Use independent oversight and review through internal committees and suitably qualified external consultants so clients are treated fairly and to help prevent abuse, such as misleading investors through data or valuations manipulation.
• Use systems and controls to prevent the preferential allocation of investment opportunities to certain clients, funds or related parties.
• Articulate business models and strategies clearly to make it easier to identify, prevent, manage and mitigate conflicts.

Consumer Duty

The Consumer Duty applies across the distribution chain to firms involved in the manufacture, promotion and distribution of, and advice relating to financial products and services for retail clients.

Although the Consumer Duty does not apply to customers who are EPCs, it does, however, apply to the process a firm uses to categorise clients. Firms were reminded that the Consumer Duty applies where there is a retail distribution chain, even when dealing indirectly with retail investors.

The FCA reiterates that a firm that encourages a customer to seek a ‘professional client’ classification simply to avoid giving the protections afforded to retail clients or allow going into an HRI would breach the Consumer Duty.

Firms that deal with EPCs therefore risk falling into scope of the Duty, if they do not have adequate investor categorisation procedures in place.

The FCA’s Findings

The FCA found that many firms showed good progress in embedding Consumer Duty into their operations. However, the FCA found that some smaller firms still need to assess how the Consumer Duty applies to their specific business models and adjust their processes accordingly.

Of interest to alternative fund managers will be the FCA’s comments concerning examples of retail investors being inappropriately onboarded to alternative investment funds with unclear product structures, uncertain drivers of return, and opaque charging strategies.

In some of these cases, firms were found to be charging significant management fees, which led to either crystallised or potential future investor losses. The firms also could not provide supporting analysis or evidence that their products delivered fair value, or clearly explain how they would avoid causing foreseeable harm to retail investors.

Good Practice

The FCA directs firms to its previous publication for good practice with respect to embedding the Consumer Duty, ‘Consumer Duty Board Reports: good practice and areas for improvement’.²  This publication sets out the findings of the FCA’s review into firms' approaches to completing the first annual Consumer Duty board report.

While much of the good practice and areas for improvement cited applies to firms of all sizes, the publication has some specific suggestions for how smaller firms might meet the FCA’s requirements.

Next Steps

The FCA will continue to monitor firm conduct in these areas, with a particular focus on its supervisory priorities as set out in its February 2025 portfolio letter to asset managers and alternatives.³

Firms are encouraged to consider whether their existing policies and practices should be enhanced reflecting the findings of the review.

^{1 https://www.fca.org.uk/publications/good-and-poor-practice/smaller-asset-managers-and-alternatives-business-model-review-our-findings#lf-chapter-id-next-steps.}

^{2 https://www.fca.org.uk/publications/good-and-poor-practice/consumer-duty-board-reports-good-practice-and-areas-improvement.}

^{3 https://www.fca.org.uk/publication/correspondence/asset-management-alternatives-portfolio-letter-2025.pdf.}