"Host" authorised fund managers (AFMs) are still making the same basic compliance failings first investigated by the predecessor to the Financial Conduct Authority (FCA) in 2012, according to a report released by the regulator yesterday. The FCA has imposed Section 166 reviews under the Financial Services and Markets Act 2000 on an undisclosed number of firms.
The damning report concluded that AFMs were failing to carry out the basic due diligence, oversight and governance checks required under FCA rules on the investment managers they purported to oversee. The report also found systems and controls failings, and that some AFMs lacked capital resources and wind-down plans.
The findings suggest that the AFM sector still presents significant risk despite a decade of intensive supervision. All the 2019/20 failings were previously identified in two earlier investigations into the sector (see FOI7011 below) in 2012 and 2014.
"The conflict of interest at the heart of the [AFM] business model might compromise a host AFM's approach," the FCA said in a presentation prepared for a discussion meeting in July 2014.
In a presentation pack for a breakfast meeting in March 2013, the then Financial Services Authority (FSA) said: "Some firms had let their commercial interest cloud their thinking when it came to fulfilling regulatory obligations".
Speaking at the launch of the report, Sheldon Mills, executive director, consumers and competition at the FCA, said AFMs played an important role in protecting investors.
"Our 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. We will take action if we find issues in firms' responses to our findings," Mills said.
The FCA began its review of AFMs, also known as authorised corporate directors (ACDs), following the collapse of Neil Woodford's Equity Income fund in 2019. Link Fund Solutions was the AFM for Woodford.
The FCA review only looked at host AFMs, but the regulator said its conclusions are of equal importance to internal AFMs. Many of the larger fund managers operate an internal AFM to oversee their investment funds.
The regulator said only AFMs that were not already the subject of an FCA investigation were selected for inclusion in the review.
The FCA split its findings into four categories: 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.
The failures recorded in each of the above categories mirror those identified in 2012 and 2014. For instance, the 2019/20 report said that "overall, firms performed badly on due diligence" and "we saw a lack of effective challenge from AFMs".
Concerns about insufficiently experienced staff expressed in the 2012 and 2014 reports are likewise repeated in the 2019/20 report.
"Some firms we reviewed were overseeing a wide variety of investment strategies without putting in place appropriate resources, including enough appropriately skilled and experienced people," the FCA said in the report.
The FCA said that a number of AFMs were unable to evidence good governance.
"Minutes of board meetings and discussions did not show effective challenge by independent non-executive directors (INEDs) of, among other things, potential conflicts and their management. In some cases, it appeared that decisions had been taken outside formal meetings with little or no discussion or challenge. In cases where follow-up actions had been identified, there were no, or only inconsistent, records of what had actually been done," the report said.
The FCA also said that some AFMs firms lacked an awareness of their financial adequacy requirements. Some were choosing to rely on professional indemnity insurance instead of carrying out adequate risk assessments, the regulator said.
All the risks and weaknesses identified in the report appear in the 2012 and 2014 reports. In the July 2014 presentation the FCA said AFMs would be kept under review by its fund supervision team.
When Woodford's fund collapsed, it appeared the FCA was unaware of the risks the fund was taking. In a letter to the Treasury Select Committee in June 2019 Andrew Bailey, then chief executive of the FCA, now Governor of the Bank of England, told lawmakers the FCA had stopped intensive monthly supervision of the fund three months before its collapse. Bailey also had to explain why it took the regulator three weeks to return a call from Guernsey's International Stock Exchange regarding its concerns about the fund.
In January 2020, Regulatory Intelligence submitted a request under the Freedom of Information Act 2000 for the results of two previous investigations into AFMs carried out by the FCA and the FSA in 2014 and 2012 respectively which had never been made public. The FCA rejected the request (FOI7011) at the end of September 2020 on the grounds that "some of the information requested constitutes 'confidential information' for the purposes of s 348 of the Financial Services and Markets Act 2000 (FSMA)" and was therefore exempt from disclosure under s 44 of the FoIA.
Section 348 of FSMA requires the FCA to obtain the consent of the party supplying the information for it to be disclosed.
Regulatory Intelligence appealed the decision on the grounds that there was public interest in knowing which firms had been flagged for further action by the regulator in 2012 and 2014.
Despite a requirement for the regulator to carry out its internal appeal review within 20 days, it took seven months for the FCA to respond. At the end of April 2021, the FCA reviewer ordered a partial disclose of the requested documents. It is these heavily redacted documents which make it clear that little has changed at AFMs in almost a decade.
In denying the request for fuller disclosure the internal reviewer stated that " s 31 (law enforcement)" of FSMA now applied. This implies that at least some of the firms investigated in 2012 and 2014 are now the subject of an FCA enforcement investigation. Regulatory Intelligence has submitted an FoI to know how many ACD/AFM firms are under investigation.
The FCA said yesterday that it was considering changing its rules in the light of the report's findings.
An appeal to the Information Commissioner's Office for full disclosure of the information requested in FOI7011 has been submitted