The Challenge
The UK Financial Conduct Authority (FCA) has reported inconsistencies in how firms in the private markets sector manage conflicts of interest. This sector includes asset managers, alternative investment fund managers (AIFMs), and investment advisers. It's expanding rapidly and becoming more intricate. According to the FCA, some firms fail to identify conflicts adequately, while others don't keep their controls up to date.
These are two distinct issues. The first is a detection problem: a conflict exists but hasn't been recognized. The second is a maintenance problem: a conflict was once recognized and controlled, but as the business evolved, the control didn't. The FCA emphasizes that firms need to prove they're treating investors fairly. Having a policy isn't enough; you need evidence that it works.
No individual firm is named, so consider this a sector-level diagnosis. The key is to understand why these failures occur and what a Third-Party Risk Manager should do about them.
The Environment and Constraints
Complexity is the main constraint. As private markets grow, firms add fund structures, co-investment arrangements, affiliated service providers, and new investor types. Each addition creates potential conflicts between the interests of the manager, the fund, an affiliate, and an investor.
Consider the pressures this puts on a conflicts framework:
- Static Registers in a Dynamic Business: A conflicts register designed for a simpler fund range misses relationships that appear after launch.
- Distributed Knowledge: Those aware of new arrangements are often in deal teams, not compliance. Compliance learns late, if at all.
- Inconsistency Across the Sector: The FCA's term "inconsistently" suggests wide variation in how firms approach identification, escalation, and review. Your counterparties won't all be at the same maturity level.
For Third-Party Risk Managers, there's an added constraint. You usually don't see the manager's internal controls directly. You rely on questionnaires, attestations, and periodic due diligence. If a manager's conflict identification is weak, your oversight inherits the blind spot.
The Approach Regulators Expect
The FCA's message suggests a workable approach despite the report's criticism. Based on its findings, firms should demonstrate three things:
Adequate Identification: Conflicts need to be found, not just listed. This requires a structured process to surface them at critical points: new fund launches, new investor classes, valuation decisions, allocation of deals between vehicles, and arrangements with affiliated parties.
Controls That Stay Current: A control is only as good as its last review against the business it governs. Firms need a trigger-based review process, so a material change to strategy, structure, or service provider arrangements prompts a reassessment of conflicts, not just an annual calendar entry.
Evidence of Fair Treatment: The regulator expects firms to prove outcomes. You should be able to show how a specific conflict was identified, who decided how to manage it, and why the result was fair to investors.
Technology can support each of these. A GRC Platform or Integrated Risk Management (IRM) Platform can hold the conflicts register, route new-arrangement notifications to compliance, track review dates, and preserve the decision trail. The tool doesn't solve detection by itself. If deal teams don't feed it, it simply records an incomplete picture efficiently. Treat technology as the mechanism for consistency and evidence, and treat the intake process as the real control.
Results and Metrics
The FCA report doesn't publish firm-level outcomes, penalty figures, or remediation timelines, so there are no results to quantify here. What the regulator has produced is a finding: inconsistency, inadequate identification, and outdated controls are present in the sector. The expected outcome is clear even if no metric is attached: firms must be able to evidence fair treatment of investors.
The absence of numbers matters. It means there's no benchmark telling you what "good enough" looks like, so the standard you'll be held to is the regulator's judgment about whether your identification and review processes are adequate for the complexity you actually operate in. Build your evidence to that standard rather than to a peer average.
What Firms Should Do Differently
Reading the finding as a gap analysis, the corrective moves are straightforward:
- Move from Periodic to Event-Driven Review: Calendar reviews alone let controls drift. Add triggers tied to business change.
- Close the Information Gap Between Deal Teams and Compliance: If conflicts are identified only after a transaction is structured, the control is reactive.
- Document Decisions, Not Just Outcomes: A register entry that says "managed" proves little. Record the rationale.
- Test the Framework: Run Scenario Analysis against realistic situations, such as an affiliate providing services to a fund, to see whether your process would catch the conflict.
Takeaways for Your Team
If you oversee external asset managers, AIFMs, or advisers, apply the FCA's findings to your own due diligence.
- Ask How Conflicts Are Identified, Not Whether a Policy Exists: Request a description of the intake process and examples of conflicts it has surfaced recently.
- Check Currency: Ask when the conflicts framework was last updated and what prompted the update. A framework unchanged through significant growth is a warning sign.
- Reflect It in the Vendor Risk Profile: Weak or inconsistent conflict management should raise the risk rating and drive more frequent Ongoing Vendor Monitoring.
- Request Evidence of Fair-Treatment Outcomes: Attestations are thin. Ask for decision records on specific conflicts.
- Review Your Own Controls Too: The same detection and maintenance failures can affect your third-party oversight program. Run a Policy Gap Analysis against the FCA's expectations.
The sector is growing more complex, and the regulator has said controls aren't keeping pace. The firms that will fare best are those that can show, with records, that they spotted their conflicts and kept their controls current.
