The Financial Conduct Authority has found some authorised corporate directors (ACDs) are operating in the asset management market with inadequate standards in place.
The findings come in a review published on Wednesday by the regulator looking into ‘host’ ACDs, also known as authorised fund managers (AFMs).
Host AFMs are fund administrators that entrust investment management to third-party investment managers outside their immediate corporations. They are tasked with making sure funds follow the rules and are run in the best interests of investors.
The FCA found while some AFM firms were operating well, others did not meet FCA standards. The regulator warned that it would be ready to take action should progress not be made in the sector.
“Authorised fund managers play an important role as fund operators and we want to ensure they contribute to a thriving investment management industry,” said FCA executive director, consumers and competition Sheldon Mills.
“Our focus on this sector will aim to ensure that the regulatory framework is in the right place to provide good value for investors balanced by appropriate protections,” Mills added.
From Q4 2019 to Q4 2020, the FCA reviewed a sample of host AFMs to examine the effectiveness of their governance, controls and monitoring.
One issue to arise was that some firms were putting distance between them and the funds, as if they were solely operated by third-party investment managers or fund sponsors, rather than themselves.
The FCA also reported a lack of risk control for investors exposed to poor value products.
On the back-burner for too long
Fund Boards Council managing director Catherine Battershill said while some host ACD firms are committed to improving their governance and oversight duties, there are still too many firms for whom this has been on the back-burner for too long.
“Today’s review has fast-tracked these issues to the fore and Fund Boards Council agrees with several of its findings, not least on the need for a greater focus on board effectiveness and more robust challenge from the independent directors on these boards,” she said.
The FCA’s findings arise following the collapse of the Woodford Equity Income fund in 2019, valued at £3.7bn, which sparked regulatory concern of the ACD market. The role of Link Fund Solutions, Woodford’s ACD, was brought into question during the probe and the ACD is currently the subject of a legal challenge over its mismanagement of the fund and failure to maintain appropriate levels of liquid assets.
See also: Woodford suspension sparks debate on in-house versus external ACDs
FCA needs to crack down where necessary
Fairview Investing director Ben Yearsley said: “Using third party ACDs gives fund managers most of the upside and far less of the downside. I don’t know whether some have been too lax in holding fund managers to account, but ultimately the ACD is the one who should be enforcing the rules and saying no to fund managers. If they aren’t then the FCA needs to crack down on them.”
As well as Link, Smith & Williamson, Carne Group, and Fund Rock are among some of the biggest third-party ACDs in the UK.
Cooper Wood and Associates, an independent consultancy firm specialising in asset servicing, advises firms on how to improve their assessment of value process.
Partner Rod Cooper said: “We are not entirely surprised by the FCA findings as our view is that there are still some firms that lack the expertise and process to fulfil their FCA requirements and still treat it as an annual tick box chore, rather than looking at it through the lens of the investor and how the overall culture of the firm can be improved.
“Assessment of value is complex, but done well it can be a huge benefit to those firms that put in place the right skill-set and infrastructure,” added Cooper.
