On 25 March 2024, the Financial Conduct Authority (FCA) published a new webpage on alternative investment fund manager (AIFM) hosting.  

The webpage provides information for AIFMs using the host model to manage alternative investment funds (AIFs), known as AIFM hosting. AIFMs can use the host model to employ staff on secondment from a third party to help manage the AIF. In this model, seconded staff help the AIFM to carry out regulated tasks, such as portfolio management of assets of the AIF, or administrative jobs like dealing with customers. In some cases, the AIFM may be a principal firm and the person seconded to the AIFM may come from one of its appointed representatives (ARs).

The webpage outlines the potential harms identified by the FCA’s 2023 review of AIFM host models, which included:

  • A lack of oversight of seconded staff.
  • Insufficient involvement in investor due diligence.
  • Inadequacies in capital adequacy calculations.

The FCA sets out its findings on each of these potential harms in more detail and provides guidance for firms operating the AIFM host model. For example:

Oversight of secondees and potential conflicts of interest

In most cases, seconded employees from third parties were found to be supervised remotely and were not physically working at the offices of the AIFM, which the FCA warns might increase the risk of harm caused by their actions. This risk is further heightened by potential conflicts of interest for the secondee, where they could prioritise the interests of the third party over those of the AIFM. Accordingly, the FCA encourages firms to have robust monitoring in place, so that they can review all fund related activities and transactions conducted by secondees. Where a firm is also a principal for an AR, it must inform the FCA about proposed secondments when adding new ARs on the regulator’s Connect system. Firms are directed to PS22/11 for more information on the FCA’s expectations.

Investor due diligence

The FCA’s review also showed that AIFMs that employed secondees were typically not involved in onboarding checks for investors into funds, as they typically used third parties. The webpage reminds firms that an appropriate level of due diligence on investors into a fund is essential to ensure the firm has effective systems and controls to counter the risk of being used to facilitate financial crime. The firm’s systems and controls should also include appropriate measures to ensure that money laundering risks are considered in day-to-day operations, including in relation to taking on new customers, as per SYSC 6.3.7G(4).

Capital adequacy

In the cases reviewed, most firms did not directly factor in the number of AIFs or ARs when calculating their capital requirements. To address this, the FCA urges firms to fully consider the risks when assessing adequate financial resources and preparing internal capital and risk assessments (ICARAs). As each new fund creates more potential risk for the principal, the FCA expects to see more consideration of risks in ICARA documents and capital calculations.

The webpage concludes by noting that the FCA has taken action against individual firms where it has observed harms rising from the AIFM hosting model, and it will continue to monitor the secondment arrangement in the AIFM sector closely.