Blog: Host-ACD's back in focus

Yesterday, the FCA issued a decision notice which alluded to a fine/ potential redress of £306m for Link Fund Solutions, due to their involvement as host-ACD of the Woodford Equity Income Fund. This is a significant sum for the ACD market and should be a serious consideration. So, what does this mean for ACD's?

Since the initial FCA probe in 2019 regarding the role of host-ACD in the UK (and closely-linked ManCo counterparts in Europe), we have seen additional scrutiny in their due diligence, delegation, governance, and oversight. There has been FSMA Section 166 skilled persons reviews over other host-ACD's in the UK market (highlighted by the FCA), and also the FCA host-ACD review last summer spelled out clearly the regulators thinking. A key point from the FCA is that this focused not only on host-ACD, but also in-house.

Having a close affinity with the Host-ACD market, it's clear to see the difficulties arising from conflicts of interest. In practice, the Investment Manager (IM) will appoint an ACD, to help with administration aspect and allow true focus on the investment side. There is an inherent conflict of interest in this process - is the IM the client, or the delegate? Strictly speaking, they are the latter but it's sometimes not easy to delineate client and delegate - especially where there are commercials! Effective challenge can be dampened where there is a client relationship, over a delegate.

Effective oversight is also a consideration. Given the role, a host-ACD will generally employ a retrospective check, on a periodic basis, to oversee the IM's activity. Given most checks are retrospective, it may be difficult for the host-ACD to effectively establish key risks and trends, where they can proactively challenge IM's to prevent potential harm to investors - until it is too late. I feel there is scope to enhance the model and make oversight more proactive given the close touchpoints with administrators (fund accountants, transfer agents, and custodians).

I am very interested to see the implementation of the FCA Consumer Duty, especially with a product governance lens. Product manufacturers will need to ensure robust adherence to FCA PROD 3, or adhere to the requirements of the Consumer Duty. Policy trumps guidance - so PROD adherence should be a strong focus in implementation! Since MiFID II, there has been additional scrutiny on the manufacture and distribution of products, ensuring effective feedback from the distribution chain. I believe, whether poor Regulation or through a lack of 'stick', that this has not generally been implemented effectively. It will be interesting to understand the role of the host-ACD in this process going forward...

FCA decision notice:https://www.fca.org.uk/publication/decision-notices/link-dye-durham-2022.pdf