The review by the Financial Conduct Authority (FCA) focused on what are called host fund managers (AFMs), companies with important but often overlooked roles in the industry as low-profile fund overseers. Host AFMs are legally responsible for managing funds, but delegate investment management to third-party fund managers.
The crucial importance of these fundraising efforts to protect customers has been sharply highlighted by the collapse of Woodford’s flagship fund in 2019, which has trapped 300,000 investors and £ 3.7 billion.
Burned investors plan to bring various lawsuits against Link Group, the UK’s largest independent provider of AFM services, arguing that the company was not responsible for overseeing Woodford and the protection of investors’ cash.
The FCA report does not mention the Woodford debacle, but is seen in the industry as part of the regulator’s response to the scandal. It it started in late 2019 months after the collapse of the Woodford Fund, attention was drawn to companies for fund overseers.
The results suggest that problems in the broader AFM industry could go beyond the Woodford case. The regulator said it would now consider whether to change the rules for the sector, or that companies should hold more capital against their risks.
“Our investigation indicates that some businesses do not adequately meet FCA standards and that we want to see significant improvement in this area,” said Sheldon Mills, executive director, consumer and competition at the FCA.
The regulators have visited a number of AGS groups to see if their management is effectively overseeing the funds for which they are responsible. The review revealed basic confusion about who AFMs work for.
‘We have sometimes observed AFMs referring to a third party investment manager to whom they have assigned as a’ client ‘. “This is a wrong description of the relationship that is expected by the regulatory framework,” the FCA said.
Although AFMs are supposed to look after investors’ interests in their funds, industry experts have long questioned whether they are unduly influenced by the fund managers who often control their contracts and the related fees.
The FCA has noted cases of “poor” fund due diligence on fund managers, lack of qualified staff to oversee funds, and poor control and conflicts of interest.
“It is precisely these kinds of challenges that have been discussed at length regarding the Woodford situation,” said Ryan Hughes, head of active portfolios at AJ Bell, an investment platform.
“The FCA made it clear some time ago that it wants to take a closer look at the host AFM market in the light of the events with Link and Woodford to ensure that investors can have confidence in the outsourced AFM model,” he said. Hughes said.
Chris Cummings, chief executive of the Investment Association, which represents the investment management industry, said the review “highlights some key issues that will address the industry”.
“Investors need to have confidence in management, oversight and broader processes that ensure fund managers deliver effectively on their behalf,” he said.
The regulator also questioned whether AFMs have enough resources to do their job properly, raising concerns about their business model. ‘We have noticed that several companies operate at relatively low operating margins and that it appears that they do not have enough investment in systems, controls and people to carry out their role as host AFM effectively. “Several companies have also cited compensation pressure from their delegated third-party investment managers,” the regulator said.
Karagh Gilliatt, a partner at law firm CMS, said that if the FCA needed more resources from AFMs, “the model could quickly become commercially unusable”, with fund managers looking for other solutions abroad.