AIFM hosting under FCA scrutiny

The FCA last week published a webpage that is particularly relevant for private fund sponsors who use UK “host AIFMs” to manage their funds or to whom they have seconded individuals, so they may carry out portfolio management activities without themselves becoming FCA authorised. This follows an FCA review of the host AIFM model in 2023. The FCA review found potential harm being caused by: 

1. a lack of oversight by host AIFMs of staff seconded to them by sponsors; and
2. insufficient host AIFM involvement in investor due diligence. 

The FCA was also critical of certain sponsors holding themselves out as authorised managers (when in fact they had merely seconded staff to host AIFMs).

The FCA has reiterated its expectation that AIFMs are responsible for the actions of all employees, including secondees, and that even where the due diligence process for investor onboarding is outsourced to fund administrators, AIFMs should still undertake regular reviews and audits of the fund administrators’ files to ensure AIFMs comply with their financial crime obligations. The FCA notes that it has taken enforcement action against some firms, and that it continues to monitor the host AIFM and secondment models closely. 

Commentary

The host AIFM and secondment models can be a convenient and cost-effective solution, especially for smaller and new private fund sponsors looking for a quick route to market without having to themselves become FCA authorised. Following this FCA intervention, sponsors who use either model:

• are reminded to take care in the communications they make to third parties, particularly investors, and to avoid misleadingly holding themselves out as authorised AIFMs or investment managers, in situations where their seconded employees are only authorised to conduct such activities on behalf of the host AIFM; and
• should expect greater scrutiny from their host AIFMs, in particular when it comes to supervision of secondees and third-party service providers (such as fund administrators) engaged to assist with investor onboarding. It is likely that host AIFMs will look to have more tangible involvement in the fundraising process, so that they can demonstrate they are meeting their own regulatory obligations.