International Funds Legal Update | 10 May 2024

The FCA publishes expectations for asset manager applications

The Financial Conduct Authority (FCA) has listed the most common errors specifically made by asset managers when applying for authorisation. Firms applying for an asset management permission should carefully address each of the points raised in light of their particular business model, together with their legal advisers.

If these points are not adequately addressed upfront, in a best-case scenario it will cause delays. Worst case, it will jeopardise the whole application. It is not uncommon for the regulator to give firms a binary choice between voluntarily revoking a poorly crafted application or see it formally rejected; over the last year 18% of applications were withdrawn or rejected due to the concerns below.

The information provided consists of a non-exhaustive list of common areas of concern. Other areas must also be addressed. Applications must avoid errors such as:

• Senior management issues. Some applicants fail to meet the FCA's expectations regarding senior management arrangements. For example, by proposing senior managers that either lack the competence or expertise to undertake the functions for which they have applied or do not hold an appropriate level of seniority.
• Non-UK office locations. Firms often misunderstand the "location of offices" threshold condition. The regulator expects the mind and management of authorised firm to be in the UK being responsible for business decisions about portfolios and distribution, and effectively overseeing outsourced activities on a day-to-day basis.
• Exposing clients to risk. The FCA accepts that all business models pose risks. But often applicants fail to identify what specific risks that their individual business model poses, or adequately consider and evidence how they might remove or mitigate these risks.
• Accountability when outsourcing. Applicants do not consider the relevant rules relating to responsibilities and the impact on their business when outsourcing functions to third parties.
• Conflicts of interest. Applicants often fail to consider potential conflicts of interest adequately or at all. The FCA emphasises that it is not its role to identify these conflicts; however, if it sees risks that a firm has not considered, this would raise concerns as to whether the applicant is aware of the risks posed by its business and how to mitigate. Given the FCA receives all applications for UK asset manager authorisations, it is well aware of the conflicts of interests that different business models pose: it wants to be reassured that firms are well aware of these as a measure of competence.
• Redress schemes. Some applicants inappropriately try to seek exemption from the Financial Ombudsman Service and the Financial Services Compensation Scheme.

The regulator has reiterated that it expects firms to be "ready, willing and organised to carry out the activities they plan to undertake" and addressing these issues forms part of adhering to this well-established doctrine.

Asset managers swing into full review mode

As expected the FCA has published finalised guidance on its new anti-greenwashing rule. The guidance helps understanding the regulator's expectations under the anti-greenwashing rule that comes into force 31 May 2024. It is broadly as expected. UK authorised firms are now in full review mode regarding all communications that could refer to any sustainability characteristics of a service or product, including funds. There is no implementation period before the regulator enforces the rules and precious little time is left.

The FCA has considered the feedback received to its consultation from November 2024 and has set out its finalised guidance in chapter two of the publication. Chapter three summarises the feedback received and its response.

Tackling greenwashing has been a major regulatory priority for the FCA for a while. Now enforcement is expected to be the next focus area.

The new anti-greenwashing rule is part of a package of measures that the FCA is implementing through its new sustainability disclosure requirements and investment labels regime.

The Bank of England focuses on private equity risk

The Bank of England (BoE), in a recent speech at Bloomberg in the City of London,  has highlighted its thinking on the growth in size, complexity and interconnectedness of the private equity market.

Nathanaël Benjamin, the BoE's executive director for financial stability strategy and risk, outlined the challenges facing the private equity sector, including the difficulties that highly leveraged-backed companies face in an environment of higher interest rates and of a lack of exit opportunities.

These issues are raising concerns for the BoE over the financial system as a whole. The vulnerabilities identified by the bank include a lack of transparency about the degree and type of leverage entering the system. It also believes that private asset valuations are opaque compared to public markets, where assets are often marked on a quarterly basis by the sponsors.

The private equity environment is becoming increasingly complex and interconnected, according to the BoE. Banks now find themselves exposed to parts of the private equity ecosystem through lending to private equity sponsors and funds, to limited partners and to the companies under private equity ownership. Pension funds and insurance companies also invest in private equity sponsors, and they are sometimes owned by private equity.

The BoE's Financial Policy Committee is considering the impact on systemic institutions, on interlinked markets, and on the real economy. The financial policy summary and record of the meeting of the committee from March 2024 also refers to these issues.

AIMA provides help regarding the US Private Fund Adviser Rule

The Alternative Investment Management Association (AIMA) has published an implementation guide on the US Private Fund Adviser Rule brought in by the US Securities and Exchange Commission. This is a helpful tool for AIMA members to prepare for the new requirements relating to private fund advisers, ahead of the deadlines on 14 September 2024 and 14 March 2025 for large private fund advisers and smaller private fund advisers, respectively.