FCA publishes their findings of the 2023 AIFM hosting review

What does this relate to?

The FCA has published its findings following its review into Alternative Investment Fund Managers (AIFM) hosting models during 2023. The AIFM hosting model permits managers to employ the help of staff members seconded from third parties to assist the AIFM with carrying out certain regulated tasks, such as portfolio management, and administrative tasks, such as dealing with customers and investors. In certain cases, the AIFM may be the principal firm and the person seconded to the AIFM may come from one of its appointed representatives.

What are the key takeaways?

The FCA highlighted three key shortcomings:

• The FCA found that there was a lack of oversight of the seconded members of staff by the AIFMs, especially where these employees were supervised remotely. The concern here stems from the increased risk of harm, particularly where the seconded employees may have a conflict of interest in favour of a third party, such as an appointed representative which is their primary employer. 
• The FCA emphasised the need for better investor due diligence on the part of the AIFMs, as many were found to be insufficiently involved in the process. For instance, a large number of AIFMs outsource investor due diligence to third parties. The FCA reminded AIFMs that appropriate risk management is essential to ensure that their firms are not used to facilitate financial crime. 
• The FCA stated that most firms reviewed did not appropriately calculate their capital requirements as they failed to factor in the number of funds or appointed representatives into their calculations. 

The FCA has taken action against individual firms in violation of the regulatory requirements and has committed to continue to monitor secondment arrangements. AIFMs currently making use of hosting models, or proposing to do so in the future, should bear this increased level of supervision in mind and ensure that any hosting arrangements comply with the FCA guidance in order to protect themselves from enforcement action.

What should you do?

The FCA set out the following recommendations to AIFMs: 

• AIFMs should bear in mind that they are ultimately responsible for the actions of all of their employees, including secondees, and should ensure that they have robust monitoring in place to avoid the actions of any secondee being potentially harmful. On the point of conflicts, AIFMs are obliged to notify the FCA of any proposed secondments from an appointed representative. 
• AIFMs are reminded that they must have sufficient systems and controls in place to counter the risk of being used for the purposes of facilitating financial crime, including in their day-to-day operations. Whilst outsourcing investor due diligence to a third party is not prohibited, AIFMs that choose to do so must regularly review and audit such third parties to ensure that they remain compliant with their financial crime obligations. 
• Whilst there is no requirement for an AIFM to increase their capital when engaging new appointed representatives, AIFMs are reminded that each new fund presents additional risk, which should be factored into capital calculations and risk assessments. 

What does this mean for advisers using host AIFM services in the UK?

Whilst the review doesn’t directly impact users of these services, it is likely the FCA’s findings will lead to increased scrutiny and oversight by host AIFMs, which may lead to higher costs and compliance oversight. 

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