Application of SYSC to a full-scope UK AIFM of an unauthorised AIF
The common platform requirements reach this population only through the closed list of exceptions at SYSC 1 Annex 1 2.6BR, and through 2.6CR for MiFID business.
The compliance rule reaches the firm in its financial crime limb only; the AIFM risk requirements sit in FUND 3.7 and level 2 articles 38 to 47, not SYSC 7; and SYSC 5 and 8 do not apply.
Conflicts arrive by a different route
The conflicts rules apply to a full-scope UK AIFM of a UK AIF and of a non-UK AIF, and 3.2ER of that annex disapplies the mechanism that would read those rules as guidance. The conflicts policy requirements bind as rules.
Organisational and resource requirements
SYSC 4.1.1R requires robust governance arrangements, a clear structure with well defined lines of responsibility, effective risk processes and internal controls, which for a full-scope UK AIFM must also take account of the AIFs it manages. Level 2 articles 16 to 29 and 57 to 66 supplement them.
Senior personnel must be of sufficiently good repute and sufficiently experienced, and experienced in relation to the investment strategies pursued. Their names and every successor's must be notified to the FCA.
The conduct duty and preferential treatment
Limb (2) offers the fund or its investors without saying which prevails where they diverge. Limb (4) prohibits rather than requires disclosure: a side letter granting a term the constituting instrument does not contemplate breaches the rule, and a most favoured nation process cannot cure it afterwards.
FUND 3.2.2R(11) separately requires pre-investment disclosure of that treatment, the investors obtaining it and, where relevant, their legal or economic links with the AIF or AIFM.
Conflicts of interest in two layers
The AIFM layer starts with avoidance. An AIFM must take all reasonable steps to avoid conflicts and, where they cannot be avoided, manage, monitor and where applicable disclose them, to prevent them adversely affecting the AIFs and their investors and to ensure the AIFs are fairly treated (SYSC 10.1.24R, in force since 22 July 2013).
The arrangements must identify, prevent, manage and monitor conflicts, segregate within the firm's own operating environment tasks which may be incompatible or generate systematic conflicts, and disclose other material conflicts in its operating conditions.
SYSC 10.1.6R requires a regularly updated record of the kinds of service or activity in which a conflict entailing a material risk of damage has arisen or may arise. Senior management must receive written reports on all those situations, frequently and at least annually, and a written conflicts policy must cover, in a group, conflicts from other group members.
Functional and hierarchical separation
An AIFM must functionally and hierarchically separate risk management from the operating units, including portfolio management, and demonstrate safeguards against conflicts allowing its independent performance and a consistently effective risk process (FUND 3.7.2R, a rule). The same two-limb structure governs in-house valuation and a conflicted delegate.
FUND 3.7.3 sets three cumulative conditions: those performing the risk function are not supervised by those responsible for the operating units, are not engaged in activities within those units, and are compensated against objectives linked to the risk function, independently of the operating units' performance. Separation must run throughout the hierarchy up to the governing body, which reviews it.
Under 3.7.4 the risk function must be represented in the governing body, or the supervisory function where one exists, at least with the same authority as portfolio management. Both are UK legislation reproducing level 2 articles 42 and 43.
Individual accountability under section 66A(5)
The FCA may act against an SMF manager where the firm contravened a relevant requirement, the manager was responsible for managing the activities in which it occurred, and the manager did not take the steps a person in their position could reasonably be expected to take to avoid it (DEPP 6.2.9-AG). Those are the steps a competent SMF manager would have taken at that time, in that individual's position and role.
Guidance at 6.2.9-EG, in force 28 March 2025, adds considerations bearing on a delegated model: whether the manager took reasonable steps to ensure a delegation went to a person with the capacity, competence, knowledge, seniority and skill to take it and to oversee its discharge, and whether they assessed and monitored the governance and risk arrangements for their activities, including corroborating and challenging the information available.
Alongside this module
Where this subject is covered elsewhere in the course.