Adviser-sponsored Oeics could lead to conflict

Oeics launched by advisers could lead to a conflict of interest between the authorised corporate director (ACD) and the adviser, according to the Financial Services Authority (FSA).

The FSA highlighted a recent trend by adviser-sponsored Oeics to appointed independent third parties as ACD or a “host ACD”.

It warns that it is a “commerical reality” that a host ACD may be reluctant to challenge the investment decisions of the investment manager or sponsor, as a service provider.

It states: “The resulting conflict of interests may inhibit the Host ACD from providing appropriate challenge.

“Consumers who buy Oeics could suffer detriment if the host ACD is unable to challenge the investment manager. Certain circumstances may increase the risk of poor oversight by host ACDs.” (article continues below)

The regulator says host ACDs may not also price service to reflect legal risk, invest sufficiently in systems and controls to guard against risks and may not be able to “absorb any losses if poor oversight produces significant financial losses to consumers”.

“Many of the investment managers used under the host ACDs model are small, newly-established firms which lack the systems and controls found in larger and more established investment managers,” it adds. “The Oeics managed by these firms often offer strategies with higher risks than offered by more traditional Oeics. We are particularly concerned that host ACDs might lack the specialist skills and systems needed to safeguard investors in these complex funds.”

The regulator says it will increase its supervisory focus on host ACDs “to ensure they understand their responsibilities and are able to meet their obligations”.