According to recent reports, a number of ACDs have been informed by the FCA that they should prepare for an industry investigation in the wake of the Woodford Equity Income fund debacle.
ACDs have, in recent years, been relatively free from FCA scrutiny – although they did play a minor role in the FCA’s studies into the fund and investment platforms sectors.
As a result of the study, the FCA implemented new rules that strengthened the duty of fund managers to act in the best interest of their investors.
But what about ACDs? What exactly is an ACD; what is their role and what should they be concentrating on in light of the FCA’s renewed interest?
What is an ACD?
An ACD is an authorised person within a corporate body given powers and duties by the FCA to operate a form of collective investment scheme called an open-ended investment company.
ACD functions may be kept in-house by investment houses. Alternatively, many more wealth managers and smaller boutique offerings have chosen to outsource these functions to external independent ACD providers.
The ACD has a fiduciary role, and a regulatory obligation, to ensure that the fund is run in the best interests of the investors, ensuring that they are protected and treated fairly.
As an authorised person, ACDs are required to adhere to the FCA’s Principles for Business, and the rules set out in the collective investment schemes sourcebook of the FCA handbook.
The ACD’s responsibilities include – among many other things – dealing with the day-to-day operation of the OEIC, managing the OEIC’s investments, buying and selling the OEIC’s shares on demand, and pricing the OEIC’s shares based on the value of the OEIC’s assets.
Subject to restrictions, these responsibilities may be delegated to appropriate third parties, but overall regulatory responsibility for performance of all of the obligations remains with the ACD.
On the hook
In the Neil Woodford saga, which has led to the suspension of the Woodford Equity Income fund, the ACD, Link Fund Solutions, delegated the management of the assets within the fund to Woodford Investment Management.
However, as WIM is not the authorised manager of the fund, Link Fund Solutions remains accountable to the FCA and remains on the hook for the operation of the fund.
Mistakes that may have been made by WIM may therefore be directly attributable to Link Fund Solutions, and they may find themselves on the receiving end of FCA enforcement action.
This should not come as a surprise to anybody acting as an ACD.
Key Points
- ACDs are currently under scrutiny from the FCA
- With the Woodford Equity Income fund, the ACD outsourced its responsibilities
- In a similar situation, the then FSA censured an ACD for outsourcing its obligations
Back in November 2013, in its final notice to Capita Finance Managers Limited, the then Financial Services Authority made it quite clear that an ACD outsourcing functions (in that case the investment management) did not absolve them from the associated regulatory requirements.
Although the CFM final notice relates to activities that occurred a considerable amount of time ago (2006-09), it provides useful and insightful reading for those currently engaged in ACD activity.
In the final notice the then FSA issued a public censure in relation to CFM, which was acting as the ACD, finding that it had breached principle two (skill care and diligence) and principle three (management and control) of the regulator’s Principles for Business.
In respect of the principle two breach, the FSA was particularly aggrieved by the fact that the ACD had delegated the role of investment manager to Arch Financial Products Limited and then promptly failed to properly monitor the performance and compliance of the investment manager delegate.
In addition, the FSA was also unhappy that when deciding to delegate this function, CFM failed to identify and manage potential conflicts of interests that existed between the delegated investment manager of the funds and the funds themselves.
The principle three breach was predicated on the fact that CFM had failed to organise and control its affairs responsibly and effectively with adequate risk management systems.
The FSA pointed to CFM’s failure to monitor the liquidity of the funds and consider what implications such liquidity might have on whether the funds were being managed by Arch Financial Products in a manner consistent with the requirement under COLL 5.6.3R.
CFM was sanctioned again by the FCA in a final notice dated November 10 2017 – this time in respect of the Connaught collapse.
Although on this occasion it was not acting as an ACD, but rather as an operator of an unauthorised collective investment scheme, there are still lessons to be learned by ACDs.
In the Connaught case, CFM had once again delegated investment functions.
And it once again failed in its oversight of the delegate and received specific criticism about its due diligence processes.
Interestingly, both CFM cases were dealt with by way of public censure rather than a financial penalty.
However, this was due to the particular circumstances of both cases and an attempt by the regulator not to penalise investors further by taking monies in the form of a penalty that could be made available to those who had lost out as a result of the behaviour.
This should not be read though as a blanket approach by the FCA to ACDs. In the future, ACDs should expect to face significant financial penalties if they are found to have breached the FCA’s principles or rules.
So, what should ACDs be aware of?
Firstly, ACDs must ensure a good working knowledge of all the relevant rules and regulations imposed by the FCA in respect of their role.
ACDs must be careful of what functions they pass over to third parties and ensure that they themselves retain sufficient knowledge and proficiency to allow them to oversee.
They should challenge the conduct of any provider they have delegated functions to, including ensuring that the delegate undertakes activities in a way that does not conflict with COLL rules.
There have always been questions around whether companies who are hired to act as ACDs are in a position to robustly challenge investment managers’ decisions.
Rightly or wrongly, there is a concern that external ACDs may be unwilling to bite the hand that feeds them.
ACDs must therefore be able to demonstrate a willingness and ability to contest and question decisions made by investment managers.
They must not forget their considerable obligations to investors and be able to show that investors’ interests are a primary consideration in all decision-making.
ACDs must also make sure that they are operating proper systems and controls in relation to all areas of the business they have responsibility for and ensure that these are properly documented and can be demonstrated to be so.
A tick-box regime is not suitable.
The FCA will be looking for ACDs to show that they operate with proper regard to the spirit and intention of the rules.
ACDs should remember that as far as the FCA is concerned, the buck stops with them.
Claire Cross is a partner at law firm Corker Binning
