Styperson POPE

Strategy & Compliance for Investment Firms


Alternative Investment Fund Managers Directive (“AIFMD”) Texts, Papers & Links

AIFMD is a major new Directive affecting (to a greater or lesser extent) pretty much all alternative investment fund (“AIF”) managers (“AIFMs”) of institutional funds and operators of UCIS.

Quite a bit of our time is being spent on AIFMD implementation projects, particularly early implementation for clients marketing funds around Europe after July 2013 (when the Directive is transposed into national law).  Other clients are planning to take advantage of the transitional year (between transposition and July 2014).  Careful structuring is needed to ensure that funds’ costs don’t increase unnecessarily, so called ‘grandfathering’ funds aren’t dragged into full compliance where other options are available, and existing tax effects are preserved.

We’re also assiting Depositaries making an entrance into the new market that AIFMD creates for their services.

The one certainty is that this will be a year for change and it will present considerable strategic challenges to existing business models, especially to the professional, third party operator model under which many smaller UCIS and institutional funds are managed in the UK (a model that’s unique in Europe).

Here are a few links to the key documents defining the UK’s implementation of the Directive.

European Union Commission: 


Compliance Audits & Monitoring Visits

This post is just a quick anatomy of a compliance monitoring visit we’re in the middle of for an FSA authorised Investment Firm.  We tailor all our compliance audits and monitoring programmes to our clients’ particular businesses and we make sure that they add value by focussing not only on the bare FSA requirements but also commenting on best practice and efficiencies.  We have developed tried and tested monitoring formats for:

Like most of our clients, the one who’s ‘enjoyed’ today’s compliance visit, is on a quarterly programme with a slightly more expanded report at mid-year and a full review at each year end.  Today (Friday) is day one of the full review, continuing Monday, and ending in the delivery of a report to the Board by the close of next week.  It’s not the best time to be taking several days out to run a full compliance audit… but then it never is!

Two of us are splitting the work, with me reviewing all of their regulated activities, policies, procedures, management systems, governance provisions, and Gabriel reports (which should be OK because we’re involved in all their FSA reporting).  Their in-house Compliance Manager is reviewing their files and records including KYC and AML, financial promotions, client categorisation, periodic statements, and suitability assessments (each based on a sample I chose at random).

Despite being only one day in, the visit has already proved invaluable with a big gap identified in their conduct of business (COBS) procedures (actually, they’d done everything right but didn’t understand why so had gone to expensive lawyers for advice each time), and a few gaps in management systems which can very easily be plugged (once you know they’re there!).

We’ll have plenty of recommendations to make and we categorise them all based on the urgency of the change and the cost or effort of completing it.  Generally we like to see through the changes we suggest but we also understand the costs involved in ‘gold plating’ and accept that perfection may be a longer-term objective!

One inevitable consequence of a compliance monitoring visit is some additional training and it’s a great way to identify areas of need.  This may be informal training for the Board in the form of talking through the report, or it might be identifying the key topics for a firm-wide workshop.

It’s easy to forget how valuable a compliance audit or monitoring visit can be and often it’s the most cost effective way of discovering problems (it’s certainly a lot cheaper than letting them revel themselves!).  If you’d like to discuss what kind of visit would be most suited to your business, do please give Simon Webber, STYPERSON POPE‘s Managing Director, a call on 07710 260 717, or e-mail sw@strategic-compliance.co.uk.


Marketing Funds: Promoting Unregulated Collective Investment Schemes

This is a long one but it’s a very complicated and misunderstood area… print it off, have a coffee, and take a deep breath…

The Financial Services and Markets Act (FSMA) imposes a restriction on unregulated collective investment schemes being marketed to the public but it also creates three sets of exemptions, each of which has its advantages and disadvantages.  (These all define to whom the fund can be promoted and by who, there are separate rules about the documents which must be used – click here for more information on when a prospectus is required.)

1. The Financial Promotions Order defines how an unauthorised firm can promote a scheme using unapproved documents.  Essentially, it allows promotion to some institutional investors and to Certified Sophisticated Investors (and, depending on the scheme’s investments, occasionally to self-certified high net worth or sophisticated investors).

Advantages to this approach are that:

  • Fees tend to be lower because,
    • the document used does not need to meet the FSA’s requirements for financial promotions, and
    • no FSA authorised firm has to take responsibility for the document.

Disadvantages are that:

  • an unauthorised (and therefore probably less expert firm) takes all of the responsibility,
  • the documents do still need to meet certain FSMA and common law requirements,
  • schemes can only be promoted to institutional and certified sophisticated investors,
  • the person making the communication has to establish that the investor is certified before making any promotion, and
  • authorised firms (eg IFAs) may not be able to pass on the promotion.

2. The Promotion of Collective Investment Scheme (Exemptions) Order contains one of the sets of exemptions to Section 238 of FSMA which restricts how an authorised firm can promote a Collective Investment Scheme. The exemptions here are very similar (but not identical) to those under the Financial Promotions Order (above).

Advantages are that:

  • an authorised firm is involved, giving comfort to partners in the fund by taking on some of the responsibility;
  • investors will feel more comforted knowing that a UK-based, FSA-authorised body is involved in the communication; and
  • the document does not have to meet the full requirements of the FSA’s financial promotion rules;
  • an authorised firm can approve the promotion to be made by unauthorised persons (but there’s little point because the promotion would be limited to the same people the unauthorised person cold promote it to anyway under the Financial Promotions Order).

Disadvantages are that:

  • fees will be higher because the firm will have to ‘verify’ the contents of the promotional material – they have a responsibility to investors to ensure that it is fair clear and not misleading;
  • schemes can still only be promoted to institutions and certified sophisticated investors;
  • the person making the communication still has to establish that the investor is certified before making any promotion; and
  • even some authorised firms (eg IFAs) can not pass on the promotion – eg if it would constitute MiFID business for them.

3. The FSA’s rules provide the final route for promotion. These define eight categories of investor to whom a scheme can be promoted without breaching the restriction in FSMA. Some of these are very specific exemptions for unusual types of schemes (like Church Funds and Lloyds underwriters) but two in particular are of more use.

Advantages of utilising these rules are that:

  • the scheme can be promoted to other groups of investors, including
    • persons assessed as suitable by an authorised firm (probably their IFA),
    • persons who have undergone an adequate assessment of their knowledge, experience and expertise by an authorised firm;
  • the scheme can be promoted in such a way as to reduce as far as possible the risk of someone making an investment who does not fit an exemption (this will mean controlling the promotion, dissuading ineligible persons from applying, and checking that applicants are eligible but unlike the other routes above, this does not need to be done ahead of making initial contact with an investor);
  • an authorised firm will take responsibility for the document; and
  • an authorised firm can approve the document for distribution by unauthorised persons.

Disadvantages of this approach are that:

  • the document will need to be more thorough, meeting all of the FSA’s requirements for financial promotions;
  • fees will be higher because the document will need to be verified by the authorised firm; and
  • an authorised firm will need to have processes and procedures in place to ensure that ineligible applicants are not permitted to participate in the scheme.

As you can see, each approach has its ‘pros and cons’ and each route is therefore suitable for certain types of schemes.

Routes 1 and 2 are most suitable for institutional schemes (ie funds where all of the investors are investment professionals, authorised firms, or high net worth companies and unincorporated associations).

If you are thinking of pursuing either of these routes and the fund is looking for investment from individuals then make sure that you or your distribution network already know a good number of Certified Sophisticated Investors (be careful to ask the right question and get the right answer because Self-Certified Sophisticated Investors, probably won’t count and certificates that do not cover unregulated collective investment schemes are useless to you).

If in any doubt, we recommend that you pick a sample of your target audience, say 20 investors, and (without telling them anything about the fund), ask them if they have a certificate and if they do, to fax it over to you.We can take a quick look at these and make sure that they are the right kind.Once you know what percentage of your target audience has these certificates then you’ll know how restricted you’ll be in promoting your fund.

Route 3 is likely to be more expensive because the authorised firm (probably the operator of the scheme) is going to be more involved – they will verify the document (as indeed they will for route 2 and you will for route 1), they will ensure it meets the FSA’s higher standards, they will approve it for distribution by you, and they will have in place process and procedures designed to stop ineligible investors from participating.

On the other hand, this route will allow more effective promotion of the scheme on the basis that investors will be protected by the assessments carried out by authorised firms (be they the operator or an IFA). If you want to promote the scheme to individuals who don’t already hold a Certificate of Sophistication covering unregulated collective investment schemes, these protections will need to be in place.

Above, I said the fact that “the document will need to be more thorough, meeting all of the FSA’s requirements for financial promotions” was a disadvantage. It might equally be seen as an advantage, both for the investor, who is better informed and therefore better protected, and for the promoter who can draw the attention of their distribution network to the involvement of an authorised firm.

StypersonPOPE can help you to determine the most effective route to employ in promoting a scheme. If you would like to discuss scheme promotion, please do contact Simon Webber,StypersonPOPE’s Managing Director, either by telephone or e-mail.


Investor Certificates: Sophisticated Investors & High Net Worth Individuals

Some communications about financial services (particularly those by unathorised firms or those related to funds) are restricted to ‘certified’ investors.  It’s important not to mix these up with an investor’s categorisation as Retail or Professional or whether they are a Qualified Investor – these are three quite separate regimes of classification.

The differences between the certificates are subtle but vital to understand. For instance, just taking sophisticated investors, there are three different types of certificate depending on what the promotion is about and who is making it – it’s possible that a single investor might hold all three and yet still not count as a ‘Certified Sophisticated Investor’ in respect of any particular investment.

Financial Promotions Order Certificates include:

  • Certified Sophisticated (signed by an authorised firm)*
  • Self-certified Sophisticated**
  • Self-certified High Net Worth**

* Only in respect of the investments the certificate lists
** Only in respect of debentures and shares in unlisted securities

Promotion of Collective Investment Scheme (Exemptions) Order Certificates cover the same categories but have slightly different content.

When relying on certificates, the promoter must ensure that the investor holds the relevant certificate before making any promotion. We recommend that they see a copy of the certificate either by post, fax or scan. This can be difficult in practice but it is the only route available to firms under these regimes.

To establish whether your target audience is likely to have the required certificates, we recommend that you pick a sample, say 20 investors, and (without telling them anything about the investment), ask them if they have a certificate and if they do, to fax it over to you.

StypersonPOPE can take a quick look at the certificates you receive and determine which ones you can rely on.

Once you know what percentage of your target audience has these certificates then you’ll know how restricted you’ll be in promoting your investment opportunity. If it proves to be unworkable, there are alternative routes available which circumvent the need for certificates entirely.

In any case, StypersonPOPE can help you to determine which certificates are appropriate and what percentage of your target audience holds them. If you would like to discuss scheme promotion, please do contact Simon Webber, StypersonPOPE’s Managing Director, either by telephone or e-mail.


Prospectus Exemptions… myths & misunderstandings

We see a lot of clients who really want to avoid having to prepare a prospectus.  Sometimes, I’m not sure all the effort is worthwhile and it may be better to take another look at the costs and time involved in putting a prospectus together if it makes the marketing easier – generally, it’s not as bad as you’d think.  Nonetheless, this article is about the exemptions, or rather about some of the imaginary exemptions we’ve heard of recently.  Our basic guide to the real exemptions can be found by clicking here.

“If working within the limit of 99 people, can’t Sophisticated Investors be excluded from the total?”

No.  It’s true that certain investors can be excluded but the only kind of private individuals who can be excluded are ‘Qualified Investors’.  These must be registered with the FSA and meeting the criteria  for sophistication is not helpful in meeting the requirements to be qualified investors (which are much closer to the criteria for an elective professional investor under MiFID).

“If relying on the minimum investment of €50k, is it OK to quote this in the literature but actually accept less than this?”

Again, no.  Generally speaking, saying one thing and doing another is a recipe for upsetting investors and getting sued.  Apart from this, the relevant rule states that “a person does not contravene section 85(1) if… the minimum consideration which may be paid by any person for transferable securities acquired by him pursuant to the offer is at least 50,000 euros”.  I suppose if you have a really good lawyer, you could get into a debate about the meanings of “may” and “pursuant” but I think we all know what the rule intends and I wouldn’t want one of my clients to be in the dock while the case law is being made. 

“Is it true that the prospectus rules don’t apply to funds which are unregulated collective investment schemes?”

Sorry, yet again, no.  The rules apply to most ‘transferable securities’ including shares in companies and units in partnerships (how most funds are structured).  It is true that there is a list of exempt investment types and that this list includes open ended funds but most smaller, unlisted or unregulated funds won’t qualify as open ended (even if they think they do).  They can, however, use one of the other exemptions.  It is worth noting that any fund listed on the LSE’s Specialist Fund Market must prepare a prospectus even if it otherwise falls into one of the exemptions.

With experience of the prospectus directive within both corporate finance and fund establishment, StypersonPOPE can help you plan which exemptions to use. For an initial discussion, please call or e-mail Simon Webber, StypersonPOPE‘s Managing Director.


FSA Principles for Businesses & Approved Persons

This isn’t a particularly original or insightful page because it’s basically just a cut and paste from the FSA’s handbook but the principles are very imoprtant to the FSA and they should be to all authorised firms as well.  They bear repeating:

FOR BUSINESSES…

1 Integrity – A firm must conduct its business with integrity.

2 Skill, care and diligence – A firm must conduct its business with due skill, care and diligence.

3 Management and control – A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.

4 Financial prudence – A firm must maintain adequate financial resources.

5 Market conduct – A firm must observe proper standards of market conduct.

6 Customers’ interests – A firm must pay due regard to the interests of its customers and treat them fairly.

7 Communications with clients – A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.

8 Conflicts of interest – A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.

9 Customers: relationships of trust – A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.

10 Clients’ assets – A firm must arrange adequate protection for clients’ assets when it is responsible for them.

11 Relations with regulators – A firm must deal with its regulators in an open and cooperative way, and must disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice.

FOR APPROVED PERSONS…

  1. An approved person must act with integrity in carrying out his controlled function.
  2. An approved person must act with due skill, care and diligence in carrying out his controlled function.
  3. An approved person must observe proper standards of market conduct in carrying out his controlled function.
  4. An approved person must deal with the FSA and with other regulators in an open and cooperative way and must disclose appropriately any information of which the FSA would reasonably expect notice.
  5. An approved person performing a significant influence function must take reasonable steps to ensure that the business of the firm for which he is responsible in his controlled function is organised so that it can be controlled effectively. 
  6. An approved person performing a significant influence function must exercise due skill, care and diligence in managing the business of the firm for which he is responsible in his controlled function.
  7. An approved person performing a significant influence function must take reasonable steps to ensure that the business of the firm for which he is responsible in his controlled function complies with the relevant requirements and standards of the regulatory system. 

(For 5-7 above, a “significant influence function”, includes Directors, Compliance Officers, and Money Laundering Reporting Officers, but not people in only a customer function.)

If you would like help in determining how these principles can be applied in practice, within your business, please do call or e-mail Simon Webber, StypersonPOPE’s MD.


Who needs to be FSA Authorised?

As is so often the case with regulation, it’s almost impossible to get an answer to a simple question like this without ending up being barraged by unhelpful and unfamiliar technical terms.  With respect to investment firms like our clients, the answer is easy:

“If, in the course of business, you carry out designated investment business with respect to specified investments and the activity isn’t excluded, or you’re not exempt, you need to be authorised.” 

But really, what use is that?!

The rules genuinely are detailed and complicated, and the terminology is technical so this can’t be a full guide but we can unpack the ‘easy answer’ above, separate out the different concepts and give a quick introduction to them so that you know what questions to ask next…

1) in the course of business
This part of the answer is not clearly defined by law but most people know whether they are doing something in the course of business or not.  If it could make you money (whether or not it actually does) and if it’s a regular activity rather than a one-off happening, it’s likely to fall within “the course of business”.

2) designated investment business
This is just a part of the much wider “regulated activities” which range from insurance business to banking but these are the ones undertaken by most investment firms.  These include (among others):

Again, common sense applies; if it feels like it should be regulated, it probably is.

3) specified investments
These are the investment instruments that are regulated.  This category includes shares, options, warrants, debentures, units in a collective investment scheme (fund), government securities, &c..

There are several popular alternative asset classes that aren’t specified investments, most notably property (real estate) but also art, wine, stamps, antiques, and the like.  You do not, therefore, need to be regulated in order to advise someone on their portfolio of wines. 

Even within these asset classes, some caution is required; because units and shares are specified investments, advising somebody to buy into an art fund, or to buy a special purpose vehicle which owns a building, is likely to be regulated.

4) excluded activity
These are activites which, were it not for the specific exemption, would require you to be authorised.  They include publishing media reports on financial matters, setting up employee share schemes, and buying or selling investments on your own behalf (as long as you don’t hold yourself out to the market as willing to do so).

5) exempt persons
Finally, these are people who have specific exemptions from requiring FSA authorisation because of who they are.  These include regulated professional firms (mainly lawyers and accountants, where the activity is incidental to the professional services they offer), appointed representatives, central banks, and certain large investment exchanges.  If you were going to fall into this category, you’d probably know already.

If you’re not sure whether you need to be authorised, it’s likely to be because you’re not sure if the activity you’re undertaking counts as ‘regulated activity’ or if you’re involved with ‘specified investments’ (2 & 3 above).  These are the key areas where you may want to seek more advice.

Of course, if you’d like to discuss with us, whether or not you need regulation, please contact Simon Webber, StypersonPOPE’s MD, either by telephone or on sw@strategic-compliance.co.uk.