Asset manager update – FCA review, new Consumer Composite Investments legislation, and changes to MIFIDPRU and MiFID Org Reg

Financial Institutions 360: Regulatory update

Read other sections of this edition of the Financial Institutions 360:

• Regulatory update
• Banks and payment services firms update
• Litigation and enforcement update

FCA review into business models of smaller asset managers and alternatives

On 8 May, the FCA published the findings of its review into the business models of smaller asset managers and alternatives (firms with under £1bn in assets under management), setting out examples of good and poor practice. The FCA looked at 410 smaller firms (out of around 1000 in the portfolio) and found that most firms were meeting regulatory expectations. The review focused on three areas:

• High-risk investments
• Conflicts of interest
• Consumer Duty (where the FCA seems particularly unhappy with firms’ compliance)

The review was part of the FCA’s Alternatives Supervisory Strategy, set in 2022. The FCA makes the following points of note:

High-risk investments (HRIs)

• The FCA had strengthened the rules relating to the promotion of HRIs in 2022.
• The FCA looked at product governance and how firms were ensuring they complied with the marketing restrictions for HRIs.
• Some firms lacked the right processes for the types of assessments they need to undertake in order to establish whether their products were RMMIs or NMMIs. Firms should be able to clearly categorise their products to ensure that the product is appropriate for the target investor.
• Elective professional clients (EPC): firms should be using structured assessments to evaluate EPC criteria, clearly document all testing, risk warnings and declarations prior to onboarding, and have post onboarding processes in place in case they need to recategorise investors or retail clients.
• Some firms lacked sufficiently robust processes for the appropriateness assessments and preliminary assessments of suitability

Conflicts of interest

• Smaller firms are more likely to have a business model in which senior staff may take on more than one role, which can lead to or exacerbate conflicts.
• Firms need to ensure that if conflicts cannot be prevented, they are managed through effective governance and conflict mitigation processes, and, if necessary, they should make an appropriate disclosure to investors.
• The FCA review includes six key good practice points and guidance in relation to conflicts of interest.

The Consumer Duty

• The FCA reminds firms that 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 being marketed to retail clients.
• The requirements will differ depending on the firm’s role, and the FCA takes a proportionate approach to its expectations of what firms should be doing.
• The FCA found that some firms had not considered the application of the Consumer Duty nor made changes to their processes.
• Even if firms did understand that the Consumer Duty applied, they were not necessarily complying with it.
• The FCA found some unsuitable high-cost investment strategies to retail investors, and also retail investors being inappropriately onboarded to AIFs.
• The FCA warns firms that it will consider regulatory action where it finds investment products offering poor value, and/or firms not acting to deliver good investor outcomes.

The FCA will continue to send out questionnaires to firms in this portfolio, with a particular focus on supervisory priorities as set out in its recent portfolio letter to the sector.

Changes to MIFIDPRU

On 24 April 2025, the FCA published a consultation CP25/10 on the definition of capital for FCA investment firms. The FCA is aiming to remove all references to the UK Capital Requirements Regulation from the definition of regulatory capital (‘own funds’) in MIFIDPRU 3. The FCA is concerned that many of the requirements in the UK CRR were designed for banks and are not necessary for investment firms, and so is proposing to remove these.

The FCA is not proposing any changes to the levels of regulatory capital that firms need to hold, but considers that this simplification process will reduce the regulatory burden on firms. According to the FCA’s analysis, the proposals will reduce the volume of rules applicable to investment firms and relating to regulatory capital by 70%. The FCA does not expect firms to make changes to their capital arrangements.

The FCA will also be undertaking a Market Risk Review, which will look at whether capital requirements for trading firms remain appropriate.

MiFID Org Reg

On 23 April 2025, the PRA published a consultation on moving the existing firm-facing requirements of the MiFID Org Reg into the Rulebook before the Treasury commences the revocation of the MiFID Org Reg. The relevant requirements to the Prudential Regulation Authority (PRA), as the prudential regulator, are outsourcing, record keeping, control procedures, risk, compliance and internal audit functions and governance. The PRA is not proposing any new requirements on firms as part of the changes. The consultation closes by 23 June.

The FCA consulted on moving the firm-facing requirements from the MiFID Org Reg relevant to FCA-regulated firms to the FCA Handbook in November of last year.

Consumer Composite Investments

On 16 April 2025, the FCA published its second consultation on Consumer Composite Investments. In their December CP, the FCA did not include draft Handbook consequential changes, so they are now consulting on changes including:

• A revised approach to the calculation of transaction costs so that firms will not need to calculate and disclose implicit transaction costs, which is intended to remove a compliance burden from firms.
• Proposed revisions to simplify current cost disclosure rules from the Mifid Org Reg to reflect the proposed CCI changes.
• Other consequential amendments.

The FCA will publish policy statements to cover both these consultations, with a view to publishing final rules by the end of 2025. This consultation closes on 28 May.

Investment research

On 9 May, the FCA published its updated rules relating to payment optionality for investment research. This follows the Investment Research Review, which made a number of recommendations, one of which was that firms should be allowed greater optionality to pay for investment research. Under MiFID II firms had been required to separate charges for research from trade execution, and fund managers had to either pay for research from their own resources, or through a separate account. Under the new rules, firms will still be able to continue to use these options, and will also be able to combine the costs, subject to certain guardrails such as cost allocation and disclosure requirements. There are consequential changes to the Handbook, including COLL.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, May 2025