FCA’s Review: Host ACD Market

02 December 2020

The sudden collapse of Neil Woodford’s fund in 2019 led the FCA to launch a review of the host ACD market early this year. While the review was officially postponed during the summer we understand that the regulator remains keen to understand the governance arrangements of firms operating within this market. 

From the FCA’s Dear CEO letter of January 2020 and from previous reviews undertaken with respect to the Principal / Appointed Representative business models we can glean some insight into the regulatory expectations with respect to Host ACD firms. Below we set out the key risk areas and how to ensure they are appropriately managed:

  • Conflicts of interest management – the FCA’s central concern is that ACDs are incentivised to avoid requiring Investment Managers (IMs) to improve systems and controls in case they take their business elsewhere. Host ACD firms should have a detailed Conflicts of Interest Policy and ensure that there is a robust process in place with respect to negotiation of fees with IMs. Where possible, the team responsible for managing relationships with IM should be appropriately segregated from the team with responsibility for ongoing oversight of delegated IMs. 
  • Governance – there should be a clear and effective governance structure in place, with at least two NEDs on the ACD Board per the recommendations of the FCA’s Asset Management Market Study. There should be Terms of Reference in place for all committees and consistent MI should be gathered on the activities of delegated IMs. The critical limits and thresholds of any KPIs monitored should be periodically revisited in the context of the broader macroeconomic and regulatory environment to ensure they remain meaningful and fit for purpose. For example, following the collapse of the Woodford fund the fund-level liquidity risk metrics captured should have been reassessed. 
  • Oversight arrangements – The level of oversight for delegated IMs should be determined by undertaking a detailed risk assessment. The FCA has expressed concern that ACDs might not have appropriate oversight capabilities or expertise to oversee certain types of funds. You should ensure that you have the skills and knowledge within the Oversight Teams necessary to effectively oversee all fund types. 
  • Product Governance – AFMs are required to act in the best interests of fund investors and are responsible for ensuring compliance with product governance rules. There should be robust new product approval procedures in place, which facilitate appropriate challenge, to ensure that funds launched represent good value to investors. 
  • Documentation and evidence – Efforts with respect to the risk areas highlighted above will be for naught without appropriate documentation and record-keeping procedures in place. Host ACDs must be able to evidence how and when they challenged delegated IMs and the outcomes of that challenge. We have seen instances in which poor record-keeping results in a regulatory breaches – improper benchmark recording could result in incorrect monitoring of the funds VAR and thus inadequate monitoring of the fund’s overall performance. Inadequate record-keeping can also result in errors in the KIID and marketing materials more broadly. This can lead to poor outcomes for investors and ultimately, regulatory sanction.  

BDO has supported firms across the financial services sector in improving their governance and oversight arrangements, with a particular focus on the Principal / AR and Host ACD business models. In recent years we have undertaken Skilled Person Reviews, assessed Board and senior management effectiveness, supported in the implementation of SM&CR, and overhauled control and oversight frameworks. We have extensive experience in this niche market and can undertake assurance work to ensure the adequacy of your governance and oversight framework as well as support you in remediating any gaps identified. 

Further information

If you would like further information, please contact Richard Barnwell.