FCA review finds weaknesses in AFM governance and operations

The FCA has published the findings of its review of "host" Authorised Fund Managers (AFMs) today, highlighting weaknesses in governance structures, conflicts of interest management and operational controls. Some key findings include:

• poor due diligence and lack of effective challenge to proposals and information from sponsors and delegate third party managers;
• inadequate oversight of delegated third party investment managers (with a nod to potential breaches of Principle 7: communications with clients);
• lack of evidence of board effectiveness and robust governance procedures;
• weaknesses in conflicts of interest frameworks;
• lack of clear risk appetite statements; and
• heavy reliance on support of parent firm to maintain capital adequacy.

On the positive side, the FCA noted that firms which operate effectively are typically well-capitalised and well-resourced, with senior management recognising and controlling the conflicts of interest inherent in the business model.

The FCA cautioned that they expect all AFMs, regardless of their business model, to consider these findings and whether there are weaknesses in their own systems. The FCA will also conduct further work to identify whether any changes to the regulatory framework are appropriate.