A number of news outlets reported last week that, as of 26 January 2015, the Financial Conduct Authority (the “FCA”) was investigating 67 firms or managers subject to the Alternative Investment Fund Managers Directive (the “AIFMD”) for a range of alleged regulatory breaches. The AIFMD was recently introduced with the majority of its requirements taking effect last summer. Firms subject to the AIFMD include managers of hedge funds, private equity funds, venture capital funds and real estate investment funds.
News of the FCA’s investigations came to light in an e-mail from the FCA in response to a freedom of information request (the “FOI request”) submitted by the finance publication HFM Week. The FCA publishes responses to FOI requests that it considers to be in the public interest, but the FCA’s e-mail response has not at this time been disclosed on the FCA’s online FOI disclosure log. However, it is reported that reasons for the investigations identified by the FCA in its e-mail include a wide range of suspected violations of rules governing client assets, financial crime, integrity, market abuse, mis-selling, customer care, transaction reporting and wholesale conduct.
This is a timely reminder that the FCA has a number of regulatory enforcement powers to punish non-criminal offences and breaches, ranging from public censures and statements and potentially unlimited financial penalties, to variation, restriction, suspension or cancellation of permissions and approvals under FSMA. The regulator can also deal with cases of non-compliance by means of private warnings.
The FCA has publicly pledged itself to a policy of “credible deterrence”, and along with other UK regulatory authorities, is seeking to restore public faith and confidence in an industry widely blamed for creating the circumstances leading to the financial crisis. In connection with this objective, a number of convictions have been secured by the FCA in recent years.
Implementation of AIFMD in the UK is still in its infancy, the transitional phase having only come to an end in July 2014. As such, the alternative fund sector is still developing best practices to address the various requirements imposed by the AIFMD. There is speculation that some of the FCA’s current investigations into Alternative Investment Fund Managers (“AIFMs”) may have arisen in connection with a large number of applications to the FCA by existing managers to vary their regulatory permissions to include the new regulated activity of acting as an AIFM under the AIFMD.
It may be worth noting that, in April 2014, the FCA set out an annual funding requirement (“AFR”) of £446.4 million for 2014-15, including “operating costs and the additional scope changes we need to embed the [AIFMD].” Set against the AFR was a “financial penalty rebate” of more than £40 million (i.e. penalties that the FCA retains less enforcement costs which are used “to reduce our fees for firms, apart from the fees of the penalty payer themselves”). This is a clear indication that the FCA intends to use its enforcement powers in part to fund its own operations.
The current intensity of the regulatory body’s engagement with AIFMs may account for this proliferation of investigations of AIFMs. The wide range of suspected violations may simply reflect shortcomings in documentation and a firm’s ability to demonstrate its compliance with the the AIFMD requirements, particularly in relation to the various operating conditions imposed by the FCA. It is not surprising that the FCA is placing the alternative fund management sector under greater scrutiny and firms should take steps to ensure that they can sufficiently demonstrate compliance.
