The Financial Conduct Authority (FCA), the UK regulator, has urged firms operating in private markets to strengthen how they handle conflicts of interest. A review found that standards vary widely across the sector as it expands.
The review covered firms in private equity, private credit and real estate. The regulator found that some firms do not identify conflicts properly or let their controls fall behind as their businesses grow larger and more complex.
Weaknesses appeared repeatedly in three areas: transfers between funds and transactions involving multiple parties, gifts and entertainment, and information barriers.
The findings were not wholly negative. The FCA highlighted firms that showed sound practice, including robust governance structures, effective oversight and independent challenge within their decision-making. It also set out where firms could improve their governance, oversight and conflict management so that investors receive fair outcomes.
Private markets cover investments in companies, assets and debt that are not listed or traded on public exchanges. The segment has grown substantially in recent years, and the UK is now a major global hub for this activity.
These markets have become a growing source of funding for businesses and a channel for investors seeking returns. However, they can create conflicts that differ from those seen in listed markets. This makes clear disclosure essential if investors are to judge whether their interests are adequately safeguarded.
The regulator expects firms to identify, record, manage and disclose conflicts in an effective way. Firms must also be able to show that investors are treated fairly. This applies especially where investors rely heavily on a firm’s judgement, governance and internal controls.
Separately from this review, the FCA is looking into governance and conflict concerns linked to private credit being used to finance consumer litigation claims. It noted that this activity carries significant potential harm for investors, consumers and markets.
FCA director of wholesale buy-side Michelle Beck said, “Firms need to ensure their management of conflicts of interest keeps pace with growth in their size and complexity. We found good practice across the sector, but standards varied considerably. We want to encourage confidence in the UK’s private markets. Firms should act on our findings and identify where they can strengthen controls.”
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