A regular briefing for the alternative asset management industry.
For many private fund managers – especially a new firm, a spin out from a larger business, or a firm that manages a relatively small pool of capital – the UK regulatory requirements can be daunting. Getting the necessary regulatory permissions is an expensive and time-consuming business, especially if there is no certainty that the fundraise will be successful, or if the fee structure leaves little headroom for advisory costs or compliance staff. The barriers to entry may even be so high that they stifle competition and innovation.
In this scenario, many firms turn to regulatory hosting services. These are well-established and enable a fund sponsor to enlist a regulated service provider to provide licensing cover for the firm's activities, together with compliance support and oversight. These arrangements are often temporary – to allow a sponsor time to establish its own regulated entity – but can be permanent, especially for smaller fund sponsors.
There are various permutations of the model, many of which rely to some extent on the UK's "appointed representative" (AR) regime. Under that regime, a regulated firm (the "principal") takes regulatory responsibility for certain types of lower risk regulated business carried on by its appointed representative, under the oversight and supervision of the principal.
(In fact, the appointed representative regime has many other uses – notably by larger asset managers who use it to help companies in their group to launch new products quickly, subject to a robust group-wide compliance framework. It also plays an important role in reducing pressure on the FCA, the relevant regulator, whose response times in various contexts are under significant pressure.)
This attention is neither new nor surprising. In 2019, the FCA completed a review of principal firms in the investment sector and "identified significant shortcomings in principals' understanding of their regulatory responsibility for their ARs". Among other things, the FCA found that principals did not exercise sufficient oversight over their ARs and did not have sufficient control over the business for which they had accepted responsibility. More recently, an influential UK parliamentary committee published a report on the failure of Greensill Capital (itself an appointed representative) which recommended (among other things) that the FCA and the government should consider reforms to the regime, noting that it was being used for purposes way beyond those envisaged when it was established in 1986 "for self-employed salespeople".
...the FCA is convinced that changes are needed: there is, it says, "significant evidence of harm" and corner-cutting...