Host Authorised Fund Managers found lacking in FCA review

The FCA has released a statement confirming it has found weaknesses in some host Authorised Fund Managers (AFMs) following its recent multi firm review. Here, Sarah Drew, from our financial services practice, explores why firms should review their systems to ensure they are compliant and mitigate disciplinary action.

A host AFM is a fund operator that delegates investment management to third party investment managers.  

The review, which involved the FCA visiting sample firms between October 2019 and October 2020, focused on the following areas: 

  1. The host firms understanding of its responsibilities for the funds it operates. 
  2. Whether firms had adequate governance and resources. 
  3. How effectively firms considered their regulatory responsibilities under the Collective Investment Scheme sourcebook (COLL) 
  4. How their oversight of delegated third party investment managers considered the interests of fund investors. 
  5. Whether the nature and scale of firms’ resources were appropriate for the business undertaken.  

Whilst some firms were operating well, the review found that others did not meet FCA standards. Notable weaknesses were found in governance, managing conflicts of interest, and operational controls.  

For clarity, The FCA has set out the following attributes it would expect to see from a host model: 

  • Sufficient capitalisation, with sufficient risk assessment of the harm that their activities could pose. 
  • Good governance from senior managers, showing a clear purpose and strategy.  
  • Sufficient experience of asset management shown through systems, staff, and staff experience.  
  • Senior managers that have full control of conflicts of interest, inherent in the business model.  
  • Holding their delegated third-party investment managers to account to achieve fair results for investors. 
  • Prioritisation of the fund investors over the operation of their business.  
  • Maintenance of a credible wind-down plan to support an orderly exit from the market.   

The FCA is now asking all AFMs (regardless of their business model) to consider whether there are any weaknesses in their provisions and to rectify any areas of concern. Additionally, it is considering whether changes to the regulatory framework are needed to address their findings. We will need to wait and see if rule changes are to follow.  

 If you need help navigating your regulatory obligations, whether to conduct an internal review of your current model or following receipt of correspondence from the FCA, we have experience in this field, so please get in contact us here