The UK fund management industry has seen a shift in how firms approach fund governance and operational oversight. Central to UK fund governance is the Authorised Corporate Director (ACD), a regulatory role that ensures funds are managed in line with investor interests and regulatory requirements. Recent scrutiny from the Financial Conduct Authority (FCA) has reshaped expectations around ACDs, particularly the independent model (also known as the hosted model), making it a more viable and increasingly trusted option for asset managers. This blog explores the implications of these changes and offers guidance for firms evaluating whether to retain an internal ACD or transition to a hosted model.
What Is an ACD, and Why Does It Matter?
An ACD is a regulated entity responsible for overseeing the activities of UK investment funds. Similar to Management Companies (ManCos) in Luxembourg and Dublin, ACDs ensure compliance with FCA rules across areas such as investment risk and liquidity, and regulatory compliance. Their role includes fund governance—overseeing day-to-day operations such as calculating NAV and managing assets—as well as risk management, where they identify and mitigate risks to safeguard investors and maintain operational resilience.
Traditionally, many asset managers have operated internal ACDs, entities embedded within their corporate structure. This model has generally become the default for many firms simply because it was the only option available at the time of their establishment. The prevailing view is that housing the ACD within the fund manager’s group structure helps retain control, with a board that is closely aligned to the investment manager it oversees.
Internal ACDs can often rely heavily on the investment manager’s risk and reporting systems, and frequently share resources who work across both entities (commonly referred to as ‘double-hatting’). This shared infrastructure helps keep cost low. However, it also raises concerns about independence and oversight, prompting the question: is the ACD effectively marking its own homework? In my experience, internal ACDs can sometimes adopt a tick-box approach to their responsibilities, rather than a more holistic model of governance, compliance, and risk management.
The Rise of the Hosted ACD Model
In contrast, the hosted ACD model, where oversight and control are undertaken by an independent third party, has gained traction. Hosted ACDs operate independently and support multiple investment managers and fund sponsors. This scale allows them to invest in specialist teams, robust systems, and oversight infrastructure that may be difficult for internal ACDs to justify or afford.
Following the collapse of the Woodford Equity Income Fund in 2019, the FCA launched a multi-firm review of hosted ACDs. The findings were mixed. While some hosted ACD firms demonstrated strong governance and oversight, others fell short—particularly in areas such as due diligence, monitoring of delegate investment managers, and escalation of issues. This was particularly evident in the case of Link Fund Solutions, which ultimately paid £230 million in redress to investors.
Since then, many hosted ACDs have invested heavily in strengthening their operational controls and governance frameworks. Today, the best of these firms demonstrate robust oversight capabilities, including active monitoring of third-party providers such as transfer agents, data vendors, and fund administrators.
This evolution has helped restore confidence in the hosted model and positioned it as a credible and, in some cases, preferable alternative to internal ACDs. Consolidation within the sector, such as Apex FundRock’s acquisition of Maitland, Waystone’s acquisition of Link, and Tutman’s acquisition of Evelyn Partners, further underscores the importance of scale and specialisation in this space.
Hosted vs. Internal ACDs: Rethinking the Model
The debate between internal and hosted ACDs echoes earlier industry hesitations around middle-office outsourcing. Initially, COOs feared losing control and incurring higher costs. Yet middle-office outsourcing has since proved out its worth, and today it’s seen as a viable option and on a level playing field as maintaining systems in-house.
The same logic now applies to ACDs. Internal ACDs offer perceived advantages, primarily being seen as a ‘safe’ option that is less likely to challenge or terminate the investment manager. However, this proximity can undermine the independence required for effective oversight. While the FCA’s scrutiny has so far focused on hosted ACDs, internal models have largely flown under the radar. This is likely to change, especially with FCA increasingly focusing in on Assessment of Value, these weaknesses become fairly easy to identify.
Meeting FCA expectations requires dedicated resources, standalone systems, and independent board members (at least 25%), all of which carry cost implications. As regulatory expectations evolve, internal ACDs will likely face mounting pressure to demonstrate genuine independence, robust governance, and operational resilience—all of which may challenge the viability of the in-house model.
Is it Time to Rethink Your ACD Model?
Choosing between an internal and hosted ACD is not just a matter of operational preference, it’s a strategic decision that should align with your firm’s long-term goals, regulatory obligations, and capacity for oversight. If your firm has an internal ACD, here are a few considerations:
- Fund Complexity
If your firm is likely to expand into complex or emerging asset classes, such as private assets or LTAFs, you’ll need to assess whether your ACD has the resources and expertise to oversee these effectively. Hosted ACDs often have broader experience and infrastructure to oversee these investment types, but internal teams may only have experience of the current asset mix invested into by their investment manager. Leveraging an independent ACD’s expertise and experience in launching more complex funds, there is opportunity for the investment manager to also reduce their speed to market.
- Operational Resources
Internal ACDs must maintain their own systems, personnel, and governance structures. If your ACD is overly reliant on the investment manager, you may need to either invest heavily in infrastructure or consider outsourcing. In many cases, the latter may prove more cost-effective.
- Operational Resilience
Hosted ACDs can reduce operational risk through independent oversight. While internal ACDs act as a second line of defence, hosted ACDs serve as an active first line—monitoring trading activity, and, in some cases, providing shadow accounting. That said, utilising an independent ACD does not transfer accountability: the investment manager remains responsible.
- Distribution Strategy and Market Reach
Firms with established European distribution may already be able to passport their funds (MiFID). However, newer or smaller firms seeking rapid market entry may benefit from hosted ACDs that often possess cross-border domain expertise to ease the navigation of varied regulatory frameworks
- Third-Party Risk Management
Oversight of an investment managers outsource providers remains a core requirement for an ACD. This requires regular due diligence on the supplier as well as ongoing oversight. For an internal ACD, this activity is not insignificant but for a hosted ACD, they can perform this activity for all their investment managers at the same time, therefore achieving significant economies of scale.
Ultimately, the decision hinges on your firm’s ability to balance control, cost, and compliance. A thorough internal review (potentially supported by external advisors) can help determine which model best supports your governance objectives and investor commitments.
Looking Ahead: FCA’s Next Focus?
With hosted ACDs now operating under tighter controls and improved governance, the FCA may soon turn its attention to internal ACDs. Historically seen as the status quo, internal models may no longer be sufficient in a regulatory environment that increasingly demands demonstrable independence, transparency, and accountability. The perceived benefits of internal ACDs—such as proximity to the investment manager and lower costs—must now be weighed against the growing need for robust oversight, dedicated resources, and scalable infrastructure.
Firms should proactively assess whether their current ACD model is fit for purpose. This means evaluating not just cost and control, but also the ability to meet evolving FCA expectations without compromising investor protection. Whether opting to retain an internal ACD or transition to a hosted model, managers must ensure their governance frameworks are resilient, independent, and future-ready.
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