The Financial Conduct Authority is to order "significantly" higher standards at some 'host' Authorised Fund Managers (AFMs) where it has identified weaknesses.

Following a detailed review of AFMs the watchdog found some needed to improve governance and operational control.

Host AFMs are fund operators that delegate investment management to third party investment managers mostly outside of their corporate group. 

Following its review, the FCA will write to all firms covered by the review and a "small number" will be required to undertake section 166 Skilled Person reports to improve compliance. The FCA will review progress each firm has made in 12-18 months. 

Firms may also be asked to hold additional capital to guard against the risks in their businesses. The FCA may also change some rules. 

The FCA said that while some firms were operating well others did not meet its standards. The regulator found weaknesses in governance structures, conflicts of interest management and operational controls.  

The FCA found some firms referring to funds as if they were solely operated by delegated third-party investment managers or fund sponsors rather than themselves. There was also a lack of focus on controlling the risk of harm from investors exposed to "inappropriate or poor value products."  

The review focused on host AFMs but some of the findings were also applicable to in-house AFMs, the FCA said. 

Sheldon Mills, executive director, consumers and competition at the FCA, said the review found a number of firms were lacking.

He said: “Our review indicates that some firms are not sufficiently meeting FCA standards and we want to see significant improvement in this area. We expect firms to look at the key findings on governance structures, conflicts of interest, operational controls and the other areas highlighted in our review and take action. We will take action if we find issues in firms’ responses to our findings."

All authorised funds in the UK are required to have an AFM, who is responsible for ensuring that the fund complies with the FCA rules. 

Ryan Hughes, head of active portfolios at AJ Bell, said some of the findings were concerning. 

He said: “The FCA had made clear some time ago that they wanted to look closer at the host AFM market in light of events with Link and Woodford to ensure that investors could have confidence in the outsourced AFM model. 

“Some of the findings from the FCA will be of concern, particularly a lack of adequate oversight, a lack of in depth understanding and a lack of evidence around robust governance procedures. It is exactly these kind of challenges that have been discussed at length regarding the Woodford situation and given the issues found by the FCA, it seems unsurprising that they intend to follow up with all host AFM firms over the next 12-18 months. More broadly, the findings in this report will need to be carefully considered by all AFM operators, both host and in house."