Information for AIFMs using the host model to manage alternative investment funds (AIFs), known as AIFM hosting.
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AIFMs can use the host model to employ staff on secondment from a third party to help manage the AIF.
In this model, seconded staff help the AIFM to carry out regulated tasks, for example, portfolio management of assets of the AIF, or administrative jobs like dealing with customers.
In some cases, the AIFM may be a principal firm and the person seconded to the AIFM may come from one of its appointed representatives (ARs).
Harm caused by AIFM host model
In 2023, we reviewed firms using the host AIFM model to assess how well they understood and complied with their regulatory responsibilities. We focused on situations where secondees from an AR were placed with an AIFM principal firm. This follows previous supervisory work in 2019[1].
During our 2023 review, we found potential harm from:
- a lack of oversight of seconded staff
- insufficient involvement in investor due diligence, and
- inadequacies in capital adequacy calculations
We also found misleading claims from third parties that had seconded staff to an AIFM. For example, we found cases of ARs marketing themselves as investment managers, wealth managers and stockbrokers, despite only seconded staff being permitted to carry out these functions on behalf of the AIFM.
Below we set out our findings from the 2023 review and provide guidance for firms operating the AIFM host model.
Oversight of secondees and potential conflicts of interest
In most of the cases we reviewed, seconded employees from third parties were supervised remotely and weren’t physically working at the offices of the AIFM. This may increase the risk of harm caused by their actions.
This risk is further heightened by potential conflicts of interest for the secondee, where they could prioritise the interests of the third party over those of the AIFM.
Your supervision responsibilities
As an AIFM, you’re responsible for the actions of all your employees, including secondees.
You must have robust monitoring in place so you can review all fund related activities and transactions conducted by secondees.
Where your firm is also a principal for an AR, you must tell us about proposed secondments when adding new ARs on Connect[2].
More information about our expectations can be found in our policy statement (PDF)[3] (paragraphs 3.46-3.52 inclusive).
Investor due diligence
Our review showed that AIFMs that employed secondees were typically not involved in onboarding checks for investors into funds - they typically used third parties.
An appropriate level of due diligence on investors into a fund is essential to ensure you have effective systems and controls in place to counter the risk that your firm is used to facilitate financial crime.
Your financial crime responsibilities
As an AIFM, you must have systems and controls sufficient for countering the risk that your firm may be used to further financial crime (SYSC 6.1.1.R and SYSC 6.3.1.R), including money laundering risks.
Your firm’s systems and controls should also include appropriate measures to ensure that money laundering risks are considered in day-to-day operations, including in relation to taking on new customers (SYSC 6.3.7G(4)).
If you’re not directly involved in the due diligence process for new clients or investors, you should undertake regular reviews and audits of the files of any third parties you delegate these functions to, including fund administration and investor onboarding, to make sure you comply with your financial crime obligations[4].
Capital adequacy
In the cases we reviewed, most firms didn’t directly factor in the number of AIFs or ARs when calculating their capital requirements.
Your responsibilities when assessing financial resources
As an AIFM, while there’s no explicit requirement to hold more capital when taking on new ARs, you should fully consider the risks when assessing adequate financial resources (PDF)[5] and preparing your internal capital and risk assessment (ICARA).
Each new fund creates more potential risk for the principal, and we expect to see more consideration of these risks in your ICARA documents and capital calculations.
Our action on AIFM hosting
We've taken action against individual firms where we’ve seen harms arising from this model.
We're continuing to monitor the secondment arrangement in the AIFM sector closely.