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The Financial Conduct Authority (FCA) recently contacted several firms that currently claim an exemption from the Financial Services Compensation (FSCS) levy. The rules have changed, and firms now need to consider when undertaking Protected Investment Business whether they have eligible income derived from underlying investors in collective investment schemes (CIS) they manage.
Please note that the FCA requires firms to respond by June 6, 2018 and either confirm that the exemption is still valid with an explanation why, or if not, report eligible income for 2017.
FCA Rule COMP 12A.3, which came into effect in April 2018, aims to bring greater consistency and clarity to when the FSCS can compensate investors in CIS’s if an operator, investment manager, manager or depositary is declared in default.
Investment managers, Alternative Investment Fund Managers (AIFMs), and any other firms caught by these rules should check that any exemption claimed from the FSCS levy is still appropriate in light of COMP 12A.3 by applying the relevant “look through” to their underlying investors.
Firms need to assess whether those investors are eligible claimants and if they are, report eligible income derived from them. As a reminder, firms can refer to FCA rule COMP 4.2 to establish who is eligible to claim from the FSCS. FCA rule COMP 5.5 defines “protected investment business”, which is designated investment business covered by the compensation scheme. Both these elements are relevant when assessing the obligation to pay the FSCS levy.
Firms should identify where they manage investments both directly or indirectly for eligible claimants. For example, circumstances where firms acting as a delegated investment manager of a CIS which is operated by an authorized fund manager still need to be considered.
Firms may still be able to claim an exemption if they do not have clients or investors in the funds they manage who would be eligible claimants under COMP 4.2.
When analyzing the fee tariff data, if firms are not able to establish the annual eligible income, an alternative option is to declare all annual income for the applicable regulated activity in calculating the FSCS levy.
Duff & Phelps will share findings on apparent inconsistencies between the FCA rules and the Consultation Papers in our next edition of Regulatory Focus.