FCA Review of host Authorised Fund Management firms
On 30 June 2021, the FCA published its review of host Authorised Fund Management firms. The FCA wanted to test the viability of the host Authorised Fund Manager (AFM) business models and assess whether conflicts of interests were being effectively managed.
The FCA included a range of AFMs that delegate investment management to third parties outside of their corporate group. They are often referred to as host AFMs or host Authorised Corporate Directors (ACDs).
From Q4 2019 to Q4 2020, the FCA visited a sample of host AFMs to review the effectiveness of their governance, controls and monitoring. These firms operate a significant number of authorised funds. The FCA also asked them questions about the risks in their business models. The FCA did not include any firms currently under investigation in their review.
The FCA examined:
- how well host AFMs understand their responsibilities for the funds they operate;
- whether these firms had adequate governance, controls and resources to carry out their role;
- how effectively the host AFM firms considered their regulatory responsibilities, primarily under the Collective Investment Scheme Sourcebook (COLL);
- how their oversight of delegated third-party investment managers considered the interests of fund investors; and
- whether they had appropriate resources for the nature and scale of the business they carried out.
The FCA found that firms that operate a host model effectively, typically have the following attributes:
- They are well capitalised, having assessed their risks and the harm their activities may pose and considered the resources they need to operate throughout the economic cycle.
- Their senior management can demonstrate good governance throughout the organisation, supporting a clear purpose and strategy.
- They are well resourced in terms of systems, staff and staff expertise, and have clear and relevant asset management experience for overseeing delegated third-party investment managers.
- Their firm’s senior management clearly recognises and controls the conflicts of interest inherent in the business model.
- They hold their delegated third-party investment managers to account to achieve fair results for investors.
- They are prepared to make decisions in the interest of the schemes they operate and of investors, disregarding the impact on their business.
- They have a credible wind-down plan, with realistic timescales and assessments of how the firm maintains resources for an orderly exit from the market.
The FCA grouped its key observations into 4 main areas:
- Due diligence over delegated third-party investment managers and funds;
- Oversight of delegated third-party investment managers and funds;
- Governance and oversight; and
- Financial resources.
The FCA expects all AFMs to consider the lessons in this summary and how they should apply it to the way they conduct their business. While the main focus of the review was AFMs managing UK UCITS funds through a host model, AFMs managing other types of authorised funds and other firms who manage AIFs should also consider the implications for their business. While its observations are focused on conflicts and issues that arose in a host model, there are also useful lessons for firms operating within a group structure.