Out-Law News 1 min. read

FCA begins review of fund authorised corporate directors

The Financial Conduct Authority (FCA) has begun a review of the role played by third party authorised corporate directors (ACDs) in the oversight of regulated investment funds.

The first such firm has already received a site visit and questionnaire from the regulator, according to the Financial Times (registration required). The FCA told the FT that its review would focus on the commercial conflicts that may arise when an external ACD is contracted by a fund to provide governance functions.

Link Fund Solutions, which acted as ACD for the LF Woodford Equity Income Fund (WEIF), is currently the subject of a separate FCA review of the events leading up to the suspension of the fund last year. The fund is to be wound up this month.

Financial regulation expert Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law, said: "The independent ACD model, whilst it has a number of merits, does not always sit comfortably with the legal and regulatory position".

Budd Elizabeth

Elizabeth Budd


The independent ACD model, whilst it has a number of merits, does not always sit comfortably with the legal and regulatory position.

"As far as the FCA is concerned it is the ACD who is entirely responsible for the fund. As such, where the ACD has delegated management to a professional investment manager it is vital that the ACD is able to, and actually does, undertake robust monitoring against the Collective Investment Rules Sourcebook (COLL) and other relevant FCA rules and is able to require changes to ensure compliance," she said.

"This investigation by the FCA, coupled with the FCA's other initiatives into the funds industry such as liquidity and operational resilience seem to indicate that the FCA is expecting to see a significant overhaul in approach with customers' best interests front and centre," she said.

New disclosure, risk warning and oversight requirements will come into force for certain non-UCITS retail schemes (NURS) later this year, along with mandated temporary suspension of dealing in NURS which invest in inherently illiquid assets where there is "material uncertainty" about the value of more than 20% of the fund's assets. The FCA wrote to fund managers last year reminding them of the importance of complying with their liquidity management responsibilities, regardless of whether they will be caught by the new rules.

The changes were thought to be prompted by the collapse of the WEIF although, as a UCITS, the fund would not have been captured by the new rules.

The FCA, Prudential Regulation Authority and Bank of England are currently consulting on their approach to improving the operational resilience of firms and financial markets infrastructure.

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