FCA Review of Principal Firms – Investment Management

The FCA yesterday published its Review of principal firms in the investment management sector.

This report followed the FCA’s very detailed review of the investment management sector in 2017, a process involving most participants in the industry.

As one of the Principal Firms to participate, Sturgeon Ventures responded to information requests and hosted a visit by the FCA in Autumn that year.

We found the FCA’s review a very useful experience, enabling us to engage with the regulator and assist it with deepening its knowledge of the day to day process of working with companies which are our Appointed Representatives (ARs), and we appreciated and promptly incorporated all follow-up observations and suggestions during early 2018.

It was good to hear first hand from the Regulator a year ago and to get our clean bill of health, but we remain fully vigilant to ensure our ongoing compliance in all areas highlighted by the FCA, including in our capacity as a firm with ARs, where we, as Principal Firm, undertake Investment Management. We clearly see the Appointed Representative structure is being a framework enabling start up businesses to be carefully chaperoned while they learn from the experienced team within a Principal Firm on how they should best operate both their corporate business and their investment business. This incubation is equally essential in looking ahead to the ARs’ ultimate independent authorisation (so providing a type of Regulatory Academy). One cannot properly acquire this detailed expertise as a start up without the support and guidance of a knowledgeable and appropriately experienced regulatory incubator.

This formal report, together with the accompanying Dear CEO letter, provide extremely useful information for anyone operating, or considering offering, services in this area. The report clearly highlights the areas where Principal Firms must be robust, and provides useful guidance for any prospective AR seeking evaluate Principal Firms, where a very emphatic focus on quality of service and compliance should be an absolute prerequisite for appointment.

The clear message to newer entrants is that the constant undercutting of fees being paid by ARs to Principal Firms will weaken the Principal Firms’ ability to ensure that ARs are correctly monitored; so putting pressure on the Principal Firms’ ability to provide proper services with inadequate resources, and consequently materially increasing the regulatory risk to both the ARs and their Principal Firm.

It is also essential for ARs to bear in mind, when evaluating potential Principal Firms, that requests made for information by their potential or selected Principal Firm, for instance to confirm their solvency, are being made in order to mitigate risks, not only to the Principal Firm but also to the clients of both the Principal Firm and the ARs. A sound Principal Firm will always place compliance and risk management ahead of any other focus, again always having in mind the proper training the Appointed Representative and its Approved Persons for their life beyond authorisation.

We very much welcome the FCA’s initiative in examining this area and requiring enhanced compliance and identifying and dealing with contraventions. This can only be good for the industry as a whole and in doing this, the FCA continues to provide an essential role in ensuring the industry works continually to maintain and, where needed, enhance standards and thus its international reputation.

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