On May 20, the UK Financial Conduct Authority (FCA) published a webpage with findings from its supervisory work on how principal firms in the investment management sector understand and comply with their regulatory responsibilities in respect of their appointed representatives (ARs).
The FCA conducted a survey of 338 principal firms, each with between one and 80 ARs. The FCA visited 15 of the principal firms for a more detailed review. The FCA was particularly interested in: business model risks; the oversight and ongoing monitoring of ARs; and financial resources.
The FCA found that most principal firms within its survey had weak or under-developed governance arrangements in place, including a lack of effective risk frameworks, internal controls and resources. Other findings of the FCA included the following:
- Onboarding process – When selecting ARs, the lack of effective risk frameworks meant that many principal firms failed to fully assess their ability to oversee prospective ARs effectively. This meant that, once onboarded, some ARs could conduct activities outside their principal firms’ core areas of expertise. The principal firm was therefore unable to have adequate oversight.
- Ongoing monitoring – A lack of an effective risk framework meant that most principal firms had not put in place appropriate controls to monitor the activities of their ARs. Some principal firms did not identify or record anything on their conflicts of interest register despite the existence of some obvious conflicts. No principal firm the FCA reviewed was regularly reviewing their ARs’ websites, some of which contained non-compliant financial promotion and inaccurate information about the AR’s regulatory status.
- Capital and liquidity assessment – Most principal firms were not assessing the risks to their firms arising from the activities of their ARs. In addition, some were not adequately assessing their risks across all risk types, including liquidity risk and their compliance with the overall liquidity adequacy rule.
- Host AIFMs – The FCA had significant concerns about the host alternative investment fund manager (AIFM) model. The FCA is particularly concerned about how conflicts of interest are managed and how many firms have inappropriate control and risk management frameworks. The FCA also found that some principals were failing to maintain effective arrangements, systems and procedures to prevent and detect market abuse because they misunderstood their regulatory obligations.
As a result of these findings, the FCA published a Dear CEO letter that reminds firms about their responsibilities towards ARs.
The FCA also intervened in relation to a number of the principal firms in its sample, which included agreeing the imposition of requirements on their regulatory permissions to either remove or to stop on-boarding ARs, asking principal firms to deregister their ARs and commissioning two skilled-persons reports. These reports will assess whether customers suffered harm and consider the adequacy of related systems and controls.
The FCA expects principal firms to assess how they are meeting requirements in relation to their ARs, as set out in the FCA Handbook. Principal firms should ensure that they identify and address any shortcomings in their firm’s risk-management frameworks, processes and practices.
The FCA’s webpage is available here.
The related Dear CEO letter is available here.