On 30 June 2021, the FCA published the findings of its multi firm review into the activities of host authorised fund manager firms (AFMs).
The FCA reports that it found that whilst some firms were operating well, others are not. 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.
In terms of the general approach to conflicts of interest, the FCA found that most firms in its review had a framework for managing conflicts of interest, but not all appeared effective. The FCA expects AFMs to take meaningful steps to avoid or prevent, manage and monitor all conflicts of interest. Several host AFMs in the review were unable to show the regulator sufficient evidence that they had identified relevant conflicts of interest despite some appearing obvious. This included, for example, the potential conflict between a fund’s investors and a sponsor whose fees are paid by the fund.
The FCA is providing written feedback to all the firms in the review. It will use tools including section 166 Skilled Person reports to improve compliance in the sector. These reports will primarily consider the adequacy of firms’ governance, systems, controls and delegated third-party manager oversight. The FCA intends to review the progress that each firm has made in the next 12 – 18 months. The FCA is also considering whether firms should hold additional capital against the risks they have in their business and will write to firms separately on this, where appropriate.
The FCA expects all AFMs, regardless of their business model, to consider the findings from the review and whether there are weaknesses in their own systems. Where necessary, AFMs should make changes to address the regulator’s concerns.
The FCA intends to conduct further work to identify whether it is appropriate to make changes to its regulatory framework. Part of that work may involve potential rule changes which would go through the standard consultation processes.