Scope of FUND 3.10
FUND 3.10 applies to a full-scope UK AIFM of a UK AIF or a non-UK AIF, for the delegation of the AIFM management functions for which it is responsible, other than supporting tasks such as administrative or technical functions (FUND 3.10.1R). Small authorised and small registered UK AIFMs are outside it, as is a supporting administrative or technical task.
The Handbook draws no line between the two, so classification is the first record in a delegation file.
Conditions for a valid delegation
The AIFM must notify the FCA before the delegation becomes effective, on the form in FUND 3 Annex 2R (FUND 3.10.2R(1), 3.10.2AR).
Limb (f)(iii) is three continuing capabilities: to monitor the delegated activity effectively at any time, to give further instructions at any time, and to withdraw the delegation with immediate effect when that is in investors' interest. A notice period with no immediate-termination right fails the third.
Cooperation under condition (d) is ensured where a cooperation arrangement is in place between the FCA and the delegate's supervisory authority under article 78(3) of the level 2 regulation (FUND 3.10.3G). A delegate not authorised for asset management needs FCA consent under regulation 26 of the AIFMD UK regulation (FUND 3.10.7G).
Investment management may never go to the depositary or a delegate of the depositary, and may go to another entity whose interests may conflict only where it has functionally and hierarchically separated that function from its conflicting tasks and the conflicts are identified, managed, monitored and disclosed to investors (FUND 3.10.6R).
Sub-delegation
Before a sub-delegation becomes effective the AIFM must have consented to it and notified the FCA of it, and the FUND 3.10.2R(2) conditions must be satisfied for the sub-delegate (FUND 3.10.4R), the notification again on the Annex 2R form. FUND 3.10.5R extends the section to any further sub-delegation, and FUND 3.10.6R applies to consent to sub-delegation.
Both duties are prior and both fall on the AIFM, so a sub-delegate first identified at an annual service review has already breached both.
The letter-box test
An AIFM must not delegate its functions to the extent that it can no longer be considered to be the AIFM of the AIF and becomes a letter-box entity (FUND 3.10.8R). The operative test is FUND 3.10.9, carried as EU legislation reproducing article 82(1) of the level 2 regulation, which opens "at least in any of the following situations", so the four limbs are a floor rather than a definition.
The AIFM is a letter-box entity where it no longer retains the expertise and resources to supervise the delegated tasks and manage their risks; where it no longer has the power to take decisions in key areas falling under senior management responsibility; where it loses its contractual rights to inquire, inspect, have access or give instructions, or the exercise of such rights becomes impossible in practice; or where it delegates investment management to an extent that exceeds by a substantial margin what it performs itself.
The last limb carries no percentage. Competent authorities assess the entire structure, weighing not only the assets under delegation but their importance to the AIF's risk and return profile and investment goals, the spread of its investments, its risk profile, the strategies pursued, the tasks delegated against those retained, and the configuration of delegates, including whether a delegate is in the AIFM's own group.
Ongoing review and liability
An AIFM must review on an ongoing basis the services provided by each delegate and sub-delegate (FUND 3.10.11R). No frequency is prescribed. It should also make each delegate aware of the equivalent duty to review its own sub-delegates (FUND 3.10.12G), and level 2 articles 75 to 82 supplement the section (FUND 3.10.13G).
Regulation 28(1) of the AIFMD UK Regulation provides that, irrespective of any contractual arrangements that provide otherwise, a full-scope UK AIFM's liability to an AIF it manages, or to an investor in it, is unaffected by delegation or further sub-delegation (FUND 3.10.10G).
EU law and the UK proposals
EU law
Directive (EU) 2024/927 applies in Member States from 16 April 2026, the expanded supervisory reporting inserted by its article 1(12) from 16 April 2027. It replaces article 8(1)(c) of AIFMD so that the AIFM's business is conducted by at least two natural persons employed full-time by it, or governing body members committed full-time to its business, domiciled in the Union. The reporting requires, per fund, the delegates, the full-time equivalent resources performing and monitoring delegated portfolio or risk management, the assets under delegation, and the dates of due diligence reviews with issues found. It does not bind a UK AIFM.
Proposed, not law
CP26/28 chapter 8 keeps the non-transfer of responsibility, the letter-box test and the best-interests and effective-supervision conditions (8.12). Pre-notification goes, replaced by notification as soon as practicable after it takes effect and confirmation in the next reporting cycle (8.21). Prior FCA approval for delegation to unauthorised entities goes (8.9), replaced by a prohibition on delegating investment management to an unauthorised entity for a specified investment unless a derogation applies (8.23). The rules widen to all authorised UK AIFMs regardless of size, making objective reasons new for small authorised UK AIFMs (8.11, 8.17), and "additional core AIFM functions" brings third-party valuation, compliance monitoring and marketing into the stricter set (8.15).
Alongside this module
Where this subject is covered elsewhere in the course.