Can you ‘borrow’ discretionary management permissions?

Only a Financial Conduct Authority-authorised firm with FCA permission ‘managing investments’ can undertake the regulated activity of managing investments.

However, applying to the FCA for this permission can be a costly and resource-intensive process, so some firms or individuals are exploring other options.

Each of these options brings with it its own set of regulatory implications, which need thorough consideration.

Appointed representatives (ARs)

An AR is a firm or person who carries on regulated activities under the responsibility of an authorised firm (principal). An AR is exempt from FCA authorisation for certain activities and the principal is responsible for the business it carries on.

The AR Regulations and FCA SUP 12 rules set out the activities for which an AR is exempt from FCA authorisation. Those activities do not include managing investments. This means an AR itself cannot undertake the regulated activity of managing investments.

The trading name solution is often presented as providing complete freedom over  investment philosophy, mandates, asset allocation policies and investment decision making

What typically happens in this scenario is that individuals in the AR are certified by the discretionary manager for the activities of ‘managing investments’ and the ‘client dealing’ function. Individuals undertake those activities through and on behalf of the principal firm, which has the requisite FCA permissions.

The key point here is that the AR itself cannot undertake investment management activity and should not hold itself out, or market itself, as the investment manager.

Trading names

Some discretionary managers offer a ‘trading name’ facility. In this scenario, a trading name of the discretionary manager is set up and registered as a trading name with the FCA.

Like the AR option above, individuals associated with the trading name are certified by the discretionary manager for relevant FCA activities and these individuals are recorded on the FCA register as certified individuals through the discretionary manager.

As the name implies, a trading name is just that – a trading name under which a company trades.

From a regulatory perspective, the FCA authorised firm remains wholly responsible for the activities undertaken by the individuals operating under its trading names and certified through it.

Real care is needed in how these arrangements are structured, managed, overseen and monitored, as well as how they are disclosed and presented to clients

The trading name solution is often presented as providing individuals with complete freedom over their investment philosophy, investment mandates, asset allocation policies and investment decision making. However, from a regulatory perspective, it is the FCA-authorised firm that is responsible and accountable for all investment management activity undertaken by its trading names.

There is nothing wrong with discretionary managers operating under different trading names or certifying individuals to work on different types of investment solutions targeted at different segments of clients. However, real care is needed in how these arrangements are structured, managed, overseen and monitored, as well as how they are disclosed and presented to clients.

It’s very important the trading name status is clearly disclosed and not buried in small print. Clients and advisers need to understand how the arrangements are structured and the name of the regulated firm responsible for the investment management activity. Clients must be able to make an informed decision.

Branches

Some providers offer a ‘branch’ solution. A branch is defined as a place of business, which has no legal personality, which is part of an investment firm, and which provides investment services through that firm.

Again, in this scenario, the ‘branch’ status, together with the identity and status of the main firm, must be clearly disclosed to clients.

Both the adviser firm and discretionary manager need to be very clear about who does what and who is responsible for what

Given that a branch is simply part or a division of the investment firm, the investment firm is responsible for all activity undertaken and needs to have robust oversight arrangements in place.

Tailored/co-manufacturing arrangements

Another option is tailored/co-manufactured arrangements. This is where an adviser firm partners with a discretionary manager to ‘manufacture’ an investment solution that meets the needs and objectives of the clients of the adviser firm.

In this scenario, both the adviser firm and discretionary manager need to be very clear about who does what and who is responsible for what.

An adviser firm, by definition, does not have FCA permission ‘managing investments’ and must not hold itself out as being the discretionary manager. Equally, the discretionary manager is the regulated firm responsible for the investment management activity and needs to have the ‘last word’ on investment decision making.

Key regulatory considerations

Whatever the structure of these types of arrangements, there are some common important regulatory considerations:

• Firms should not hold themselves out as undertaking an activity for which they do not have FCA permission
• Communications to clients about roles and responsibilities must be clear. Clients need to understand who is doing what so they can make an informed decision
• Roles should not be overstated, confused or open to misinterpretation
• Fee structures need to be clearly articulated and factored into respective value assessments

An adviser recommending a discretionary management solution must ensure the recommendation is suitable for each client.

As part of their due-diligence process, the adviser needs to understand who is providing what service and ensure the structure of the arrangement is suitable for their clients. If anything goes wrong, the structure of the discretionary management arrangements may come under scrutiny.

Advisers need to understand who the provider is of any discretionary management solution they recommend, who is sitting behind any contractual arrangements and who takes regulatory responsibility.

Vanessa Johnson is head of compliance strategy at Threesixty