At a glance

  • The FCA has found significant weaknesses in host authorised fund managers’ (AFM) governance structures, conflicts of interest management and operational controls. It intends to conduct further work to identify whether changes are needed to the regulatory framework.

  • A key issue is that, from a commercial perspective, delegated investment managers can be viewed as the host AFM’s “clients”, which is at odds with the relationship anticipated by the regulatory framework. This creates a conflict of interest which host AFMs need to manage carefully. In our view, it is good practice for host AFMs to ensure that they are not overly reliant on a single delegate from a commercial perspective.

  • Some host AFMs lack the expertise and resources to challenge their delegates effectively. When considering how much expertise and resources an AFM needs, we think it is useful to ask whether the AFM could effectively manage the delegated funds itself on a temporary basis if needed.

  • The FCA found that host AFMs often did not have a detailed knowledge of the funds they oversee or of how the delegate’s policies and procedures are implemented in practice. In our view, it is important for AFMs to understand how the delegate’s policies and procedures apply to specific investment strategies, and to receive management information (MI) from delegates that is relevant to each fund’s strategy.

  • At board level, the FCA found evidence of informal decision-making, lack of non-executive director (NED) challenge, and risk and conflicts of interest registers not being discussed. In view of the FCA’s broader push to improve governance on AFM boards, we expect increasing pressure from the FCA on firms that demonstrate poor practice in this area.  


Against the backdrop of recent industry events that highlighted weaknesses in fund governance, the FCA has released the findings of its multi-firm review of host AFMs. A “host AFM” is a fund operator that delegates investment management to a third party outside of its corporate group. Typically, the delegate acts as the fund’s “sponsor” and has a significant influence over the fund’s design, distribution and management. Most AFMs are structured as authorised corporate directors (ACDs) and “host ACD” is a more common industry term, but the definition of AFM is slightly broader.

The review focused on governance, controls and monitoring by host AFMs, including how they managed conflicts of interest in their relationship with investment managers. The FCA found significant failings, and intends to keep a close watch in this area going forward.  Whilst this review focused on host AFMs managing UK UCITS funds, the findings are also relevant to in-house AFMs, firms managing non-UCITS funds, and investment managers with sub-delegation arrangements.

This review is one of several reviews the FCA has been conducting in the investment management sector with a view to improving customer outcomes, value for money and governance and controls. Other recent reviews include its product governance review and its fund value assessments review.

We have illustrated the attributes of an effective host AFM – as described by the FCA – in the image below, before we delve into key themes we identified in the review. The FCA is likely to expect compliance with these attributes, as a minimum.

Conflicts of interest

A key theme in this review is the inherent conflict of interest that exists in the host AFM business model, since from a regulatory perspective a host AFM’s role is to provide effective oversight over its delegates, whereas from a commercial perspective the delegates can be viewed as the host AFM’s clients. Firms need to manage this conflict of interest carefully to ensure that they act in investors’ best interests.

The FCA found several examples of this conflict of interest not being appropriately managed. Some firms could not even show sufficient evidence that they had identified this conflict of interest, even though the FCA described it as “obvious”.

The FCA referred to its rules on value assessments, where it found that some firms had worked hard to negotiate break points in fees paid to depositaries and fund accountants, but most firms had not considered negotiating break points in the much larger fees paid for asset management services. One firm told the FCA that it was unreasonable to expect it to hold such discussions with its investment managers as it thought the delegate investment managers were its clients.

The FCA found that some firms had agreed with fund sponsors to cut their AFM charges as funds under management grew. While this reflected economies of scale from their AFM operations, the benefit of this fee cut did not go to fund investors but solely to sponsors through a greater share of an unchanged Ongoing Charges Figure (OCF). The FCA stated that it is concerned that firms are not acting in a way that prevents undue costs to funds and investors.

Firms need to ensure that they are identifying and managing the conflict of interest in their relationship with their delegates effectively. In our view, a good starting point is for a host AFM to ensure that it is not overly dependent on a single delegate for its revenue and that it has sufficient financial resources to meet its needs in the event of the delegate seeking to use another host AFM.

Expertise and resources

Another key issue is whether the AFM has sufficient knowledge, expertise and resources to oversee the funds for which it is responsible. The FCA expects staff responsible for fund oversight to have direct experience in the relevant financial instruments and to have detailed knowledge on the funds they oversee. The review found that several firms operate at relatively low operating margins and did not have appropriate resources, including enough appropriately skilled and experienced people. Several firms cited fee pressure from their delegates, which suggests that some host AFMs may not be adequately charging to execute their services effectively. 

In our view, when considering how much expertise and resources an AFM needs, it is useful to ask whether the AFM could manage the delegated funds effectively on a temporary basis if the delegation arrangement were to cease at short notice, for example if the delegate were to resign.

Oversight of funds and delegates

The FCA found that some firms did not have enough knowledge of the funds they oversee to enable them to provide effective oversight and challenge. For example, some firms relied on informal conversations with delegates during the on-boarding process rather than following a set process. Other firms placed too much reliance on investment managers’ written policies and procedures, with little monitoring of their implementation in practice. Some firms did not demonstrate adequate oversight of how delegates performed in different risk environments against fund objectives, benchmarks and peers. Applications for fund authorisation often required material changes, and firms often had to refer questions from the FCA back to the delegated investment manager, implying a lack of knowledge.

In our experience, it is important that AFMs receive key performance indicators and risk metrics that are relevant to each fund’s strategy rather than being “one size fits all”. It is also important for AFMs to understand how a delegate’s policies apply to their mandate specifically, and what level of monitoring the delegate is doing on their mandate. For example, this would include whether the delegate’s best execution policy adequately reflects the types of assets associated with the mandate and whether they have appropriate compliance procedures. We have seen some examples of firms placing an over-reliance on delegates’ attestations of compliance or looking at policies and procedures only in a high-level, generic way. AFMs also need to consider delegates’ infrastructure and resilience, including business continuity plans (some of which have been tested during Covid-19).


The FCA’s review found that a number of host AFMs were unable to provide evidence of robust governance procedures. In particular, board meeting minutes did not show effective challenge by independent NEDs. The regulator also flagged that at times decisions had been taken outside formal meetings with little or no challenge or discussion. Where there was evidence of challenge, there were no, or only inconsistent records of, what had been done. Where board discussions happened outside board meetings with limited attendance, some board members may not have been given an opportunity to provide challenge. In some cases, risk and conflicts of interest registers were not updated or discussed by boards.

The FCA’s findings are particularly pertinent in view of its broader push to improve governance on AFM boards. Now that its requirements for independent directors, value assessments and acting in investors’ best interests are fully embedded, the FCA is no doubt expecting to see improvements in governance outcomes, and is likely to put increasing pressure on boards if it does not.

Next Steps

In light of the FCA’s findings, we recommend that host AFMs - and also in-house AFMs - do a comprehensive review of their conflicts of interest management, resources and expertise, oversight of funds and delegates, and board governance. AFMs need be able to demonstrate that they have actively engaged in ensuring good customer outcomes and are managing conflicts of interests in their relationship with delegates effectively. The FCA expects AFMs to have sufficient expertise and a granular understanding of delegates’ investment policies and strategies and risk and compliance procedures. Boards need to demonstrate effective challenge and oversight of risks and conflicts of interest.

The FCA intends to use section 166 Skilled Person reports to improve compliance. These reports will primarily consider the adequacy of firms’ governance, systems, controls and delegated third party manager oversight. For the firms in the review the FCA will review progress over next 12-18 months.

The FCA intends to conduct further work to identify whether rule changes are needed.