Published on 30th June FCA have released their findings from supervisory activity from Q4 2019 to Q4 2020. The majority of those included were either host AFMs or host ACDs and questions included risk in business models, governance, controls, and monitoring.
Using the requirements and guidance from COLL, SYSC, COBS, PROD sourcebooks and of course the well-beloved Principles for Businesses the finding make for uncomfortable reading for some and will undoubtably support those consumers still braying for blood over the Woodford failure.
It’s not all bad news, so let’s start with the highlights of positives from those deemed to be operating effectively;
- Well capitalised, with risk properly assessed throughout the economic cycle.
- Senior Managers demonstrating good governance.
- Well-resourced systems, staff with expertise clearly and effectively managing 3rd party Investment managers including holding them to account to achieve fair treatment of customers
- Managing conflicts including where required taking decisions to benefit of schemes and customers, disregarding the impact on their business.
- Have credible wind down plan with realistic timescales and impact assessments.
The findings which highlighted sub optimal operating models are broken down into 4 areas;
- Due diligence over delegated third-party investment managers and funds
- Oversight of delegated third-party investment managers and funds
- Governance and oversight
- Financial resources
I could reference all the regulatory references that FCA pointed to here, but I’ll let you read the full findings. What was quite scary was following quote from the report “While some firms did follow a set process, others relied on more informal conversations to assess and understand proposals. 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.”
Oversight of requirements: delegation
The FCA took particular issue with AFMs referring to 3rd party investment managers as the “the client” and highlighted this as an incorrect description of the relationship within the regulatory framework.
They highlighted the fact that staff at AFM need to be appropriately skilled and experienced individuals to be responsible for oversight not just of instruments but also their strategies. This is likely to be why the regulator highlighted poor oversighted from an apparent lack of knowledge of the PROD rules, little evidence of formal qualifications and first-hand experience of investing or risk management.
Governance and oversight
Board challenge, decisions made outside of formal meetings, weak INEDs, limited attendance, lack of understanding of the inherent COIs, it doesn’t make for good reading and didn’t get much better when they reported on the Assessment of Value requirements as there appears to be confusion about the application of the 7 review considerations.
Cited here was a lack of investment in systems, controls, and people to execute the role. The effectiveness of the risk management framework with unclear risk appetite statements leading to management being unable to articulate how they would identify if the firm was operating outside of its risk tolerance. Some firms appear to be relying heavily on support from a parent, which again as separately regulated entities appears to be a lack of understanding of the regulatory framework. Stress testing and wind down plans as mentioned above was limited and didn’t appear to be credible.
What happens now – All the firms interviewed will receive written feedback and a small number will actually have to undertake a S166 to improve compliance. Progress will be reviewed over the next 12-18 months with some firms expected to hold additional capital to guard against the risk in their business. The FCA finished by saying changes in rules may be made. In the meantime all AFMs and other regulated entities are guided to FG20/1, Threshold condition 2.4 and Principle 4.
To read the full Review of host Authorised Fund Management Firms Click here;