28th April 2020
Prior to the Covid-19 environment we saw a number of new fund managers coming to market, typically spinning out from large, established fund managers where they not only gained a successful track record but also became increasingly frustrated with lack of speed and flexibility executing good quality deal flow. The current environment may expedite this trend as LPs are likely to consider JVs and club deals where they have the opportunity to review a transaction first.
There will be a number of opportunities over the coming months for new managers taking advantage of the dislocation in illiquid asset classes. However, speed will be important and the regulatory hurdles can be time-consuming. In order to carry out regulated financial activities in the UK, including arranging and advising on deals, such managers will need to be either directly authorised by the Financial Conduct Authority (‘FCA’), or become an appointed representative (‘AR’) of an authorised firm (‘Principal’).
Direct FCA Authorisation vs Appointed Representative
Obtaining direct FCA authorisation can be a rigorous and time-consuming process, with timescales ranging from 6 months to well over a year. There is also the ongoing compliance burden to consider; directly authorised firms will often need to hire additional staff with specific compliance expertise. Furthermore, there is the FCA capital adequacy requirement to consider – typically the higher of £20,000 or 5% of the investment business income.
As an AR, managers rely on the permissions of the Principal, and can often be up and running in as little as 4-6 weeks. The monitoring plan, compliance policies, procedures and governance are all provided by the Principal firm, reducing the administrative burden on the manager.
One clear benefit of getting direct FCA authorisation is the ability to manage investments – something which an AR cannot do. However in practice, we often see a host-AIFM appointed as manager of the fund, and so the AR becomes the investment adviser.
Roles and Responsibilities of an Appointed Representative
When becoming an AR, managers must allow the Principal access to their staff, premises and records for the purpose of carrying out their supervisory duties. The Principal will also carry out a compliance monitoring plan to ensure the AR is operating within the regulatory framework. The AR will also need to prove it is financially viable at all times, provide regular updates on its activities, and subscribe and commit to training as directed by the Principal.
In summary, for managers new to the market that are looking to begin performing regulated activities in a short timeframe, whilst reducing their administrative burden, the AR model is one which has been tried and tested. Langham Hall currently provides this service to a number of fund managers across multiple asset classes, both on a standalone basis and alongside our administration and AIFMD services.
Langham Hall is an award winning provider of Fund Administration, Depositary and AIFMD services to global fund managers. To hear more about how we can help, whatever the requirements, please get in touch with a member of our team.