Key Takeaways
- • The UK Financial Conduct Authority found that private market firms vary significantly in how well they identify and manage conflicts of interest, with some failing to identify conflicts adequately or keep controls up to date as their business models grow more complex.
- • Recurring weaknesses were identified in cross-fund transfers and multi-party transactions, gifts and entertainment, and information barriers.
- • The FCA expects firms to identify, record, manage and disclose conflicts effectively and to demonstrate that investors are treated fairly, particularly where investors rely heavily on firm judgement, governance and controls.
- • The review covered private equity, private credit and real estate, and identified examples of good practice including strong governance, effective oversight and independent challenge.
- • Separately, the FCA is examining governance and conflicts concerns over the use of private credit to fund consumer litigation claims, which it says carry significant risks of harm to investors, consumers and markets; this work was not part of the review.
Summary
The Financial Conduct Authority has called on private market firms to strengthen how they manage conflicts of interest as the sector expands, according to findings from its latest review. The FCA said firms differ considerably in how well they identify and manage conflicts, and that management of conflicts must keep pace with growth in firms' size and complexity. Private markets, which cover investments in assets, companies or debt not listed or traded on public exchanges, have grown significantly in recent years, and the UK is described as a leading international centre for them.
The review examined how firms identify, manage, mitigate and disclose conflicts across private equity, private credit and real estate. The FCA found examples of good practice, including strong governance arrangements, effective oversight and independent challenge. It also identified areas where firms could strengthen governance, oversight and conflicts management to support fair investor outcomes. Recurring weaknesses were found in cross-fund transfers and multi-party transactions, gifts and entertainment, and information barriers, and some firms were failing to identify conflicts adequately or to update their controls.
Michelle Beck, director of wholesale buy-side at the FCA, said: "Firms need to ensure their management of conflicts of interest keeps pace with growth in their size and complexity. We found good practice across the sector, but standards varied considerably. We want to encourage confidence in the UK's private markets. Firms should act on our findings and identify where they can strengthen controls."
The FCA expects firms to be able to identify, record, manage and disclose conflicts and to demonstrate that investors are treated fairly, particularly where investors place significant reliance on firm judgement, governance and controls. The review forms part of the regulator's wider supervisory focus on private markets and investor outcomes.
Separately, and outside the scope of this review, the FCA said it is examining governance and conflicts concerns relating to the use of private credit to fund consumer litigation claims, citing significant risks of harm to investors, consumers and markets.
The review examined how firms identify, manage, mitigate and disclose conflicts across private equity, private credit and real estate. The FCA found examples of good practice, including strong governance arrangements, effective oversight and independent challenge. It also identified areas where firms could strengthen governance, oversight and conflicts management to support fair investor outcomes. Recurring weaknesses were found in cross-fund transfers and multi-party transactions, gifts and entertainment, and information barriers, and some firms were failing to identify conflicts adequately or to update their controls.
Michelle Beck, director of wholesale buy-side at the FCA, said: "Firms need to ensure their management of conflicts of interest keeps pace with growth in their size and complexity. We found good practice across the sector, but standards varied considerably. We want to encourage confidence in the UK's private markets. Firms should act on our findings and identify where they can strengthen controls."
The FCA expects firms to be able to identify, record, manage and disclose conflicts and to demonstrate that investors are treated fairly, particularly where investors place significant reliance on firm judgement, governance and controls. The review forms part of the regulator's wider supervisory focus on private markets and investor outcomes.
Separately, and outside the scope of this review, the FCA said it is examining governance and conflicts concerns relating to the use of private credit to fund consumer litigation claims, citing significant risks of harm to investors, consumers and markets.
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