An FCA review of 242 alternative asset managers found gaps in transaction monitoring, client risk assessment, AML assurance and outsourcing oversight, with private market firms facing greater PEP and ownership risks.
FCA Review Covers 242 Firms, with Nearly 30% Lacking Formal Transaction Monitoring Systems
Survey findings published by the UK Financial Conduct Authority (FCA) on Wednesday showed that nearly three in ten alternative asset management firms covered by its review did not have a formal transaction monitoring system. According to the source material, the FCA surveyed 242 firms and achieved a response rate of 87%.
The findings form the basis of a newFM Intelligenceanalysis report examining financial crime controls across the alternative asset management industry. The data indicate gaps in client risk assessment, ongoing monitoring and management oversight.
Scope of the Review and Overall Findings
The review focused on financial crime control frameworks within the alternative asset management industry, covering transaction monitoring, client onboarding, risk assessment and ongoing monitoring. The FCA emphasised that the data describe weaknesses in systems and governance rather than confirmed cases of money laundering or other financial crime. The data also provide only a cross-sectional view at a single point in time and cannot reliably predict how the identified control gaps may evolve.
(Source: Financial Conduct Authority,FM Intelligence Analysis Report, published: Wednesday according to the source material, section: overall survey findings.)
Multiple Gaps Identified in Risk Assessment and Monitoring
Among the firms that responded to the FCA survey, 29% reported that they did not have a formal transaction monitoring system. A further 18% lacked a documented client risk assessment methodology, while the same proportion had not conducted formal anti-money laundering (AML) quality assurance. The review also found that 10% of firms did not verify clients’ sources of wealth, 7% did not conduct systematic monitoring after client onboarding, and a further 7% did not rescreen clients.
Overview of the Principal Control Gaps
29% of firms did not have a formal transaction monitoring system;
18% lacked a documented client risk assessment methodology;
18% had not conducted formal AML quality assurance;
10% did not verify clients’ sources of wealth;
7% did not conduct systematic monitoring after client onboarding;
7% did not rescreen clients.
| Review Area | Proportion of Firms | Control Function | Details |
|---|---|---|---|
| No formal transaction monitoring system | 29% | Transaction monitoring | Nearly three in ten firms had not established a formal framework |
| No documented client risk assessment methodology | 18% | Client risk assessment | A further 18% had not conducted AML quality assurance |
| Did not verify clients’ sources of wealth | 10% | Client onboarding | 7% did not conduct systematic post-onboarding monitoring |
| Retained full onboarding oversight after outsourcing | 36% | Outsourced compliance | Approximately 40% of firms outsourced some compliance functions |
Private Markets Face Greater Politically Exposed Person Risk
Financial crime risk exposure varied across business models. Politically exposed persons (PEPs) were included in the client bases of 32% of private market firms, compared with only 9% of firms operating outside private markets. The frequency of exposure among private market firms was therefore 3.6 times higher, although the FCA did not disclose the number of respondents in each of the two subsamples.
Complex Ownership Structures Are More Common in Private Markets
Approximately one fifth of firms in the private markets segment reported that more than 30% of their clients used complex ownership structures. Outside private markets, 85% of firms reported that none of their clients used complex ownership structures. This difference indicates that private market firms face greater demands in relation to client due diligence and beneficial ownership identification.
(Source: Financial Conduct Authority,FM Intelligence Analysis Report, published: Wednesday according to the source material, section: comparison of business models and risk exposure.)
Outsourced Compliance Operations Create Oversight Gaps
Approximately 40% of firms outsourced some of their compliance operations. However, according to the regulator’s data, only 36% of those firms retained full oversight of the AML client onboarding process. This suggests that although outsourcing arrangements may improve operational efficiency, they may also weaken firms’ direct control over critical compliance functions.
Potential Implications for the Industry and Clients
Gaps in transaction monitoring and ongoing monitoring may increase the risk that financial crime is not detected promptly;
The absence of a documented risk assessment methodology may undermine the consistency and auditability of client risk classifications;
Inadequate oversight of outsourced functions may create uncertainty over responsibility during the client onboarding process;
Private market firms face relatively greater control pressures because of their higher concentration of PEP exposure and complex ownership structures.
According to the source material, the fullFM Intelligenceanalysis report examines these findings, their limitations and the mismatch between reported risk exposures and financial crime control measures in greater depth. The source material did not state whether the FCA intends to take targeted supervisory action or issue remediation requirements in response, and this therefore remains to be confirmed.
