Firms that delegate the investment management of their strategies to third-party firms need to improve their standards.
While some so-called host authorized fund managers are operating well, others are not meeting Financial Conduct Authority standards, the watchdog warned Wednesday. Following investigations between the fourth quarters of 2019 and 2020, the FCA found weaknesses in governance structures, conflicts of interest management and operational controls.
Some host AFMs were also referring to strategies as though they were operated only by the third-party investment managers or fund sponsors rather than themselves, the FCA said in a news release outlining its findings. There was also evidence of a lack of controlling the risk of harm from investors that are exposed to inappropriate or poor value products.
In its reviews, the FCA looked at how well host AFMs understand their responsibilities for the strategies they operate; whether these firms had adequate governance, controls and resources in place to carry out their responsibilities; how effectively they considered their regulatory responsibilities; how their oversight of delegated third-party managers took the interests of investors into account; and whether AFMs had appropriate resources in place for the nature and scale of the business they operate.
"Our review indicates that some firms are not sufficiently meeting FCA standards and we want to see significant improvement in this area,"
Sheldon Mills, executive director, consumers and competition at the FCA, said in the news release. "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."
All authorized strategies in the U.K. must have an authorized fund manager that is responsible for ensuring that the strategy complies with FCA rules.
All firms included in the review will receive feedback from the FCA, while a small number will need to improve compliance. Progress will be reviewed for each firm in the next 12 to 18 months. Some firms may be required to hold additional capital to protect against risks in their businesses.
The FCA is also looking into whether changes are needed to its regulatory framework for AFMs.
