In January of this year, the FCA sent a “Dear CEO” letter outlining its refocused supervisory strategy for their firms. In this communication, the regulator detailed their view of the key risks posed by alternative investment firms to their customers and their wider markets. Although not specifically listed as risk item, the FCA did warn that, in their experience, standards of governance “…particularly at the level of the regulated entity, generally fall below our expectations.”
Nine months on, ACA has observed the FCA following up on this letter. It is approaching private market firms and enquiring as to how they, the firms, not only consider governance internally, but also with respect to their portfolio companies.
As part of this follow up the FCA is requesting details of internal governance structures, how directors of the portfolio companies are appointed (and what independent challenge is offered), and how the associated policies have been followed for differing portfolio companies.
The FCA are also interested in how conflicts of interest are identified, dealt with and mitigated, not only internally but again at the portfolio company level. This specific request payed close attention to the roles that the directors play.
Governance has always been high on the agenda of the FCA, with the Senior Managers and Certification Regime (“SM&CR”) being the most recent example of the regulator seeking to (re)enforce governance structures on the back of numerous financial crises/issues. Firms should ensure that the internal governance structures referenced in the various statements of responsibilities for their Senior Managers are in place and that committees do actually meet. Agendas and minutes of these committee meetings should be maintained to evidence the existence and outputs of the committees. Minutes of this type are a common request by the FCA during an investigation thematic or otherwise.
The added wrinkle now is, of course, the FCA’s interest in how a private markets focussed firm looks to influence or install governance within its portfolio companies. Given the timing, it is not beyond the realms of possibility that the FCA has concerns about the influence the investment firm may have had, or not had, on companies struggling as a result of the COVID-19 pandemic.
Whatever the reason, it is hard to argue that Private Markets were not forewarned about this potential follow up. January may feel like a long, long time ago, but it appears the FCA are dusting off their 2020 supervisory ‘to-do’ list, with private markets at the top.
How We Help
ACA can assist in reviewing your overall governance structures, conflicts of interest register and policies including looking through to the portfolio company level.
For addressing governance concerns regarding cybersecurity and privacy, our Aponix team can help you with:
- ACA Aponix Protect, designed to provide a flexible, robust, and cost-effective cybersecurity program over the course of a year, not just at one point in time. Available in three tiers, the solution provides access to ACA’s cyber, privacy, and risk consultant base for testing, validation, and operational support. It also provides day-to-day cybersecurity coverage, as well as the ability to quickly respond to future threats and regulatory changes.
- ACA PortCo Defend, which provides a portfolio-based cyber risk/maturity assessment and ongoing support services to identify risk and help preserve portfolio company value throughout the investment lifecycle. With this service, our Aponix team provide private fund managers with ongoing visibility into the cybersecurity operations of their investments. We work directly with the portfolio companies to identify cybersecurity threats, vulnerabilities, and weaknesses, while also providing risk ranked tactical and strategic remediation recommendations and ongoing training and monitoring services.
For More Information
For more information contact Andrew Poole, Andy Welch or your usual ACA consultant.