FCA review finds weaknesses in some ‘host’ Authorised Fund Management firms’ governance and operations

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.   

Sheldon Mills, Executive Director, Consumers and Competition at the FCA said: 

'Authorised Fund Managers play an important role as fund operators and we want to ensure they contribute to a thriving investment management industry. Our review indicates that some firms are not sufficiently meeting FCA standards and we want to see significant improvement in this area. We expect firms to look at the key findings on governance structures, conflicts of interest, operational controls, and the other areas highlighted in our review and take action. We will take action if we find issues in firms’ responses to our findings. 

Our 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. 

Notes to editors

1. Read the findings[1] of the multi firm review into the activities of host Authorised Fund Manager firms.

2. The FCA visited a sample of host AFMs between Q4 2019 and Q4 2020. 

3. Firms under investigation by the FCA were not included in the review. 

4. On 11 June 2020, the FCA published finalised guidance (FG 20/1[2]) for all UK regulated firms, setting out our expectations of the practices they should adopt in their assessments of adequate financial resources. We underlined the importance of this guidance in firms’ being able to demonstrate compliance with Threshold Condition 2.4[3] and Principle 4[4].   

5. An authorised fund manager (or AFM) is the fund operator of an authorised open-ended investment company, an authorised contractual scheme or authorised unit trust. These are types of funds that are authorised by the FCA.

6. Find out more information about the FCA[5].