‘Host’ authorised fund managers (AFMs) have been told to tighten up control of their funds and better manage conflicts of interest following a review by the Financial Conduct Authority (FCA). All UK authorised funds are required to appoint an AFM, who is responsible for ensuring that the fund complies with FCA rules. Host AFMs, who could be authorised corporate directors or authorised unit trust managers, are those that delegate investment management to third party managers outside of their corporate group, although the FCA said that some of the findings of its review were also applicable to in-house AFMs. The FCA said that it would provide written feedback to all firms in the review, while a small number will be required to undertake section 166 ‘skilled person’ reports to improve compliance or to hold additional capital against the risks that they are exposed to. It will review the progress each firm has made in 12-18 months and may propose changes to the regulatory framework, including rule changes, should this be necessary. These latest findings are the strongest indication yet that host AFMs must up their game and take strong regulatory control of their funds or the FCA will actively intervene – whether by rule change or disciplinary action. The reality is that in a hosting model, the investment manager usually holds the commercial and economic power in the relationship. This is at odds with where the regulatory obligations require the power to be. These findings show that that balance of power needs to shift. The FCA expects host AFMs to be well-capitalised and well-resourced, with senior management in place who recognise and control the conflicts of interest inherent in the business model. While some of the firms reviewed by the FCA were operating well, the regulator found weaknesses in governance structures, conflicts of interest controls and operational controls at others. Some of the firms reviewed were found by the FCA to be referring to funds as if they were solely operated by the third-party investment manager or fund sponsor; while others lacked sufficient focus on controlling the risk of harm to investors from being exposed to inappropriate or poor value products. The FCA was also concerned about the ‘onboarding’ process for investment managers, noting that in some cases there was no obvious link between questions asked and the outcomes to be tracked. While some host AFMs followed a set process, others relied on more informal conversations to assess and understand proposals and did not always gather the detailed knowledge required about the funds for which they would have responsibility.

Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. The FCA does not regulate tax advice. This newsletter is provided strictly for general consideration only and is based on our understanding of law and HM Revenue & Customs practice as of July 2021 and the contents of the Finance Bill. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.