The Financial Conduct Authority (FCA) is considering new rules for the authorised corporate director (ACD), or "host authorised fund manager" (AFM), market, after a review of the sector found failings across governance, conflict of interest management and operational controls.
A report published today (30 June) by the regulator called for improved standards in the market, where it found a number of firms failing to meet regulatory standards, and warned that the FCA is ready to intervene if progress is not made.
The review, which surveyed a sample of firms in the year to Q4 2020, targeted AFMs that delegate investment management to third parties outside of their corporate group.
It investigated the viability of "host" business models and assessed whether conflicts of interests were being effectively managed.
The suspension and eventual collapse of the Woodford Equity Income fund in 2019 sparked regulatory scrutiny of the ACD market, with ongoing examination of Link Asset Services' role in the scandal.
The FCA's extensive report found failings in four key areas: due diligence over delegated third-party investment managers and funds, oversight of delegated third-party investment managers and funds, governance and oversight, and financial resources.
Due diligence in particular was highlighted as an area where firms "performed poorly" across the board.
"We are concerned that 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," the report said. "Where firms did identify risks or inconsistencies they were often addressed inadequately."
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.
As a result, the FCA is providing written feedback to all the firms in this review and will use regulatory tools "to improve compliance in the sector". The regulator intends to review the progress that each firm has made in the next 12 to 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.
It described the findings as "significant" and, as a result, the regulator said it intends to conduct further work to identify whether it is appropriate to make further changes to its regulatory framework.
"Part of that work may involve potential rule changes which would go through the standard consultation processes, separate from this review," it added.
"Where firms have deficiencies in either financial or non-financial resources, we will ensure they take the necessary steps to resolve this. This might involve us assessing their financial resources, including capital and liquidity positions. Where firms are found to be in breach, we will ask them to rectify this."
Executive director for consumers and competition at the FCA Sheldon Mills explained that the 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," he added. "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."
