The Financial Conduct Authority (FCA), who conducted a review of private market valuations in 2024, said valuations have to be “robust and reliable in all market conditions” in order to maintain the trust of investors.
According to Reed Smith, the FCA's March 2024 review highlights a growing unease regarding the transparency and accuracy of private asset valuations, which have come under scrutiny as global interest rates climb. Unlike publicly traded assets, private assets often lack clear valuation benchmarks, raising questions about their true worth and the potential risks posed to investors and the broader financial system. The review aims to address these concerns by evaluating governance structures, accountability, and the oversight mechanisms in place within firms handling private assets.
Recent developments, including the FCA's “Dear CEO” letter, emphasize the importance of rigorous valuation practices. The letter outlines the FCA's intention to assess various aspects of asset valuation, including the personal accountabilities of firms, the functioning of valuation committees, and the accuracy of information reported to boards. By scrutinizing these elements, the FCA seeks to ensure that private asset valuations are conducted with the highest level of integrity, thus protecting investors from potential misvaluations.
“There is a high volume of significant business and regulatory change to be delivered in 2024,” FCA Wholesale Buy-Side Director Camille Blackburn wrote in the “Dear CEO” letter. “This change is likely to impact business models, products and services, as well as customer outcomes and markets.”
This review aligns with broader regulatory priorities, including the implementation of Consumer Duty regulations designed to improve the value and pricing of financial products. Asset managers are expected to comply with these standards, which also encompass sustainability and operational resilience. As firms prepare for potential regulatory changes, the FCA’s focus on robust valuation practices underscores its commitment to maintaining market trust and stability.
“A higher interest rate and tighter credit environment has placed pressure on the valuations of some assets,” the letter said. “ As more investors seek access to private markets, it is vital that they can trust that valuations are robust and reliable in all market conditions.”
In addition to addressing valuation concerns, the FCA is also concentrating on technological innovation, competition, and international regulatory standards. The agency's support for initiatives like fund tokenization and global standards for digital assets reflects its ongoing efforts to modernize the financial sector while ensuring investor protection and market integrity.