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FCA Publishes Supervisory Findings and Dear CEO Letter About Principals and Appointed Representatives in the Investment Management Sector

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.

©2020 Katten Muchin Rosenman LLPNational Law Review, Volume IX, Number 144


About this Author

John Ahern, Financial Attorney, London, Katten Law Firm

John Ahern, partner at Katten Muchin Rosenman UK LLP and head of the London Financial Services group, focuses his practice on banking, financial services, UK and European financial markets, and related regulations. His background in private practice and as in-house counsel at a global investment bank provides him with perspective on the unique regulatory issues facing the wholesale and private banking sectors. John advises multilateral trading facilities, broker-dealers and banks on trading, clearing and settlement as well as custody of securities—both physical and...

+44 (0) 20 7770 5253
Carolyn H. Jackson, International Attorney, Katten Muchin law firm

Carolyn Jackson is a partner in Katten Muchin Rosenman UK LLP and is a Registered Foreign Lawyer. She provides US financial regulatory legal advice to a broad range of market participants, including commercial banks, investment banks, investment managers, broker-dealers, electronic trading platforms, clearinghouses, trade associations and over-the-counter derivatives service providers.

Carolyn guides clients in the structuring and offering of complex securities, commodities and derivatives transactions and in complying with US securities and commodities laws and regulations. 

+44 0 20 7776 7625
Nathaniel Lalone, Katten Muchin Law Firm, Financial Institutions Attorney
Senior Associate

Nathaniel Lalone, a partner at Katten Muchin Rosenman UK LLP, has a broad range of experience in the regulation of financial products and financial markets, and frequently provides regulatory and compliance advice to trading venues, clearing houses and buy-side firms active in the over-the-counter (OTC) derivatives, futures and securities markets. He is actively involved in advising clients on the implementation of MiFID 2 and MiFIR in the European Union as well as the international reach of US financial services regulation. He also has significant experience with structuring...

+44 0 20 7776 7629
Neil Robson, private equity fund managers counselor, Katten Law Firm, London

Neil Robson, a regulatory and compliance partner with Katten Muchin Rosenman LLP, focuses his practice on counseling hedge and private equity fund managers and other investment advisers on operational, regulatory and compliance issues. He regularly addresses Financial Conduct Authority (FCA) and EU authorization and compliance under both the EU Alternative Investment Fund Managers Directive (AIFM Directive) and MiFID, cross-border issues in the financial services sector, market abuse, anti-money laundering and regulatory capital requirements, formations and buyouts of...