Key Takeaways
- • The FCA found that private market firms are failing to identify conflicts of interest adequately or keep their controls up to date, according to a recent review by the regulator.
- • Good practice was observed across private equity, private credit and real estate, but standards varied considerably across the sector.
- • 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 demonstrate that investors are treated fairly.
- • The FCA is separately examining governance and conflicts concerns linked to private credit funding consumer litigation claims, which it says carry significant risks of harm.
Summary
Private market firms are failing to identify conflicts of interest adequately or to keep their controls up to date, according to a recent review by the Financial Conduct Authority (FCA), as reported by Money Marketing. The regulator found examples of good practice across private equity, private credit and real estate asset classes, but also identified recurring weaknesses.
The FCA noted that private markets have grown significantly in recent years and play an important role in providing capital to businesses and investment return opportunities. It stressed that these markets can give rise to conflicts that differ from those in public markets, making effective disclosure crucial so investors can assess whether their interests are being protected. Strong governance arrangements, effective oversight and independence challenge from firms were identified as good practice.
The weaknesses identified span cross-fund transfers and multi-party transactions, gifts and entertainment, and information barriers. The regulator expects firms to be able to identify, record, manage and disclose conflicts effectively, and to demonstrate that investors are being treated fairly. The FCA said this is particularly important where investors place significant reliance on firms' judgement, governance and controls.
FCA director of wholesale buy-side Michelle Beck said: "Firms need to ensure their management of conflicts of interest keeps pace with growth in their size and complexity." She added: "We found good practice across the sector, but standards varied considerably. We want to encourage confidence in the UK's private markets," and urged firms to "act on our findings and identify where they can strengthen controls."
Although not part of this review, the FCA is examining governance and conflicts concerns relating to the use of private credit to fund consumer litigation claims, including significant risks of harm to investors, consumers and markets.
The FCA noted that private markets have grown significantly in recent years and play an important role in providing capital to businesses and investment return opportunities. It stressed that these markets can give rise to conflicts that differ from those in public markets, making effective disclosure crucial so investors can assess whether their interests are being protected. Strong governance arrangements, effective oversight and independence challenge from firms were identified as good practice.
The weaknesses identified span cross-fund transfers and multi-party transactions, gifts and entertainment, and information barriers. The regulator expects firms to be able to identify, record, manage and disclose conflicts effectively, and to demonstrate that investors are being treated fairly. The FCA said this is particularly important where investors place significant reliance on firms' judgement, governance and controls.
FCA director of wholesale buy-side Michelle Beck said: "Firms need to ensure their management of conflicts of interest keeps pace with growth in their size and complexity." She added: "We found good practice across the sector, but standards varied considerably. We want to encourage confidence in the UK's private markets," and urged firms to "act on our findings and identify where they can strengthen controls."
Although not part of this review, the FCA is examining governance and conflicts concerns relating to the use of private credit to fund consumer litigation claims, including significant risks of harm to investors, consumers and markets.
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