UNITED KINGDOM: FCA Review Finds Weaknesses in Some ‘Host’ Authorised Fund Management Firms’ Governance and Operations

Wednesday June 30 2021

The Financial Conduct Authority (FCA) has called for so-called ‘host’ Authorised Managers (AFMs) to improve their standards following a review of firms published on 30^th June.

Host AFMs are fund operators that delegate investment management to third party investment managers outside of their corporate group.

The FCA found that, while some firms were operating well, others did not meet FCA standards. The FCA found weaknesses in governance structures, conflicts of interest management and operational controls.

The FCA also found some firms referring to funds as if they were solely operated by delegate third-party investment managers or fund sponsors rather than themselves, and a lack of focus on controlling the risk of harm from investors exposed to inappropriate or poor value products.

The review focussed on host AFMs but some of the findings are also applicable to in-house AFMs.

The FCA’s focus on this sector will aim to ensure that the regulatory framework is in the right place to provide good value for investors balanced by appropriate protections, and we will consider whether we need to make changes to rules to supplement the work of this review and its findings.

All authorised funds in the UK are required to have an AFM, who is responsible for ensuring that the fund complies with the FCA rules.

Firms which operate effectively typically are well capitalised and well-resourced, with senior management recognising and controlling the conflicts of interest inherent in the business model.

The FCA will provide written feedback to all firms in the review and a small number will be required to undertake section 166 Skilled Person reports to improve compliance. The FCA will review the progress each firm has made in 12-18 months. Firms may also be asked to hold additional capital to guard against the risks they have in their business.

The FCA is also conducting further work to identify whether changes are needed to the regulatory framework that firms operate under. This could include rule changes.

Click on the above link for further information.