The FCA's recent review of financial crime controls within asset management offers valuable insight into how the regulator views financial crime risk across an evolving sector.

While many firms show a strong understanding of regulatory requirements, the FCA did identify weaknesses across firms’ control frameworks. This includes risk assessments, customer due diligence and governance and oversight arrangements. As the private credit and alternative investment strategies continue to grow, firms must evolve their financial crime frameworks at the same pace.

What did the FCA’s financial crime review look at?

The FCA’s review involved a sector-wide questionnaire, REP-CRIM returns and interviews with firms across different business models and risk profiles. Firms were assessed against the UK Money Laundering Regulations, FCA Financial Crime Guide, Senior Management Arrangements, Systems and Controls (SYSC) requirements and wider industry guidance.

This review should not be viewed in isolation as it follows the FCA's recent multi-firm review of financial crime controls within the insurance sector. That review also identified similar themes around risk assessments, customer due diligence, monitoring arrangements and third-party oversight.

Together, these reviews suggest a broadening of the FCA's financial crime supervisory agenda. While banks have traditionally been subject to the greatest level of scrutiny in this area, the regulator is increasingly looking at how non-bank financial institutions identify and mitigate financial crime risk. Moving forward, asset managers and alternative firms should expect their financial crime frameworks to get greater regulatory attention.

What did the review find?

Private markets and private credit have historically been seen as specialist areas. Today though, they are an increasingly important part of the wider asset and wealth management landscape as a growing number of firms look for opportunities beyond traditional asset classes.

The FCA's review highlights that firms in these markets often face greater financial crime risk than those focused on traditional asset classes. Complex ownership structures, higher-risk customer profiles and international capital flows are all more common among private market participants. The use of multiple intermediaries and cross-border transactions also creates additional challenges around beneficial ownership, source of wealth and ongoing monitoring.

These risks can be seen playing out in the recent fallout and systemic exposure in the sector from the collapse of Market Financial Solutions (MFS) amid allegations of fraud and financial crime.

The review shows that private markets, private credit and other alternative investment strategies and business models can create higher inherent financial crime risks. Where these risks are greater, firms need to implement control frameworks that are proportionate. The key issue is not the existence of the risk itself, but whether firms can show that their controls are robust enough to identify, assess and manage it effectively.

Understanding risk remains fundamental

The FCA's found that over 20% of firms either have not completed a business-wide risk assessment or have one that was incomplete. In some cases, firms hadn’t properly assessed risks arising from their products, customers or operating model.

This is concerning because a robust risk assessment is the foundation of an effective financial crime framework. Especially as firms expand into new products, jurisdictions and investment strategies, they need to make sure their risk assessments and associated financial crime risk appetites evolve accordingly.

In practical terms, this means treating risk assessments as living tools, regularly updating them to reflect changes in business activities and emerging threats in addition to combining qualitative and quantitative insights.

FCA findings on customer due diligence and governance

Weaknesses were also identified in customer risk assessments (CRAs), beneficial ownership identification and wider due diligence arrangements. The finding on CRA is particularly stark. Failure to conduct a thorough CRA that is informed by a range of different risk factors can result in potential non-compliance with due diligence requirements. It can also weaken monitoring of customer relationships and transactions.

The FCA highlights several areas for improvement in governance arrangements, management information, screening controls and staff training. While the issues identified varied across firms, the findings reinforce the need for financial crime controls to be documented and supported by effective oversight, meaningful risk reporting and appropriately skilled personnel.

For boards and senior management, the implications go way beyond regulatory compliance. Weak customer risk assessments, inadequate due diligence or poor-quality management information all make it harder to identify emerging risks and challenge first-line activities. Ultimately, this limits the ability to make informed decisions about business growth, product development and risk appetite which ultimately impact enterprise value.

Effective governance requires more than periodic reporting. Boards should be able to show clear oversight of financial crime risk, evidence-based challenge of management information and a structured approach to assessing the effectiveness of the firm's control environment. clear oversight of financial crime risk, evidence-based challenge of management information and a structured approach to assessing the effectiveness of the firm's control environment.

Looking ahead: what the FCA review means for asset managers

The FCA's review provides a clear view of the direction of travel for financial crime supervision. Alongside the recent insurance review, it reinforces the message that firms must understand their risks, design proportionate controls and be able to demonstrate that those controls are effective in practice.

Asset managers, particularly those operating in private markets and private credit, need to start reassessing whether financial crime frameworks are aligned to increasingly complex products, investor structures and cross-border activities. Firms that can clearly show a risk-based and evidence-led approach will be able to meet evolving regulatory expectations and support ever changing business models in a sustainable way.

To discuss your financial crime control needs please contact Peter Hawkins.

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