The FCA Publish Their Review Of Host Authorised Fund Management Firms
June 30, 2021
On June 30th, the Financial Conduct Authority (FCA) published a review of "Host Authorised Fund Management Firms". The review was carried out to test the viability of the host Authorised Fund Manager (AFM) business models and assess whether conflicts of interests were being effectively managed.
The review highlighted key findings under four main areas:
1. Due diligence over delegated third-party investment managers and funds
The review found that the majority of firms performed below expectations in this area. It was found that many firms relied on informal conversations to assess and understand proposals. The FCA were concerned with this process as "firms did not gather the level of detailed knowledge required, through their due diligence, to adequately understand the funds for which they would have responsibility." When risks were identified by firms, the FCA found that these were addressed inadequately.
The FCA also commented, "We saw a lack of effective challenge from AFMs to proposals and information from sponsors and delegate third party managers throughout the due diligence process." It was found that there was an over reliance on delegates having written policies in place, with little observation or testing.
2. Oversight of delegated third-party investment managers and funds
In the review, the FCA were keen to point out the regulations around where an AFM delegates investment management to a third party it must "ensure that it can effectively monitor them and must retain the necessary resources and expertise to do so." The FCA noted that they observed AFMs referring to third-party investment managers to whom they have delegated functions as their ‘client’. The FCA stressed that "this is an incorrect description of the relationship anticipated by the regulatory framework."
A number of firms were also found to have poor oversight of delegated third-party investment managers. The FCA outlined the minimum requirements they expect in this area:
- Operating with a clear understanding of tolerance levels for each of the indicators being used, referenced to acceptable consumer outcomes.
- Having clear lines of escalation for issues that fall outside of tolerance, and clear tracking metrics to ensure issues are followed to conclusion.
- Using a risk metric that is determined to be appropriate for each fund, rather than operating with a ‘one size fits all’ approach.
- Ensuring the frequency of data and the time periods used are consistent with the fund’s objectives. For example, only looking at the previous month’s performance is inconsistent with medium term return objectives.
3. Governance and oversight
Speaking about Board effectiveness, The FCA noted that a number of AFM's were unable to provide evidence of robust governance procedures. It was found that decisions were being made outside of formal meetings with no evidence of discussion or challenge. Where follow-up action was needed, there were no records of what had actually been done.
When assessing the input of independent non-executive directors (INEDS), The FCA reported "a wide difference in the quality of contribution from the INEDS." It was noted that risk and conflicts of interest registers were static, standalone documents, and there was little to no Board discussion about them. Several AFMs who were part of the review were unable to produce sufficient evidence that they had identified relevant conflicts of interests despite some appearing obvious.
4. Financial resources
The final area that was highlighted was around financial resources. The FCA questioned the business model of some AFMs as "several firms operate at relatively low operating margins and appear to lack appropriate investment in systems, controls and people to execute their role as host AFM effectively"
There were wide differences found when it came to risk frameworks and the effectiveness, maturity, coverage and governance of these frameworks within firms. "A number of firms did not have clear risk appetite statements, meaning management could not articulate how they would identify if the firm was operating outside of its risk tolerance. Several firms were not adequately assessing the risks from their activities and the harm they may pose (to consumers, the wider market or the firm) across all risk types, including operational risk."
In some cases, it was suggested that they saw risk requirements as tick box exercises rather than processes used in the business. Finally, The FCA noted errors in regulatory reporting from firms.
Written feedback will be provided to all firms in the review. The progress of each firm will also be reviewed in the next 12-18 months. The FCA expects AFMs to consider these findings and whether there are weaknesses in their own systems. Where necessary, they should make changes to address our concerns.
As The FCA have found significant shortfalls they intend "to conduct further work to identify whether it is appropriate to make changes to our regulatory framework."
How ViClarity Can Help
ViClarity have a long history of working with organisations in this sector, helping them automate day to day Governance, Risk & Compliance processes such as those mentioned in the report above. By removing the manual nature of collecting, collating and reporting on the information required for The FCA, firms benefit from having more time to analyse and action shortfalls and track their progress on real time grid views and reports on the ViClarity platform.
See how ViClarity can streamline your GRC efforts by booking a demo today: