Is your UK family office FCA-authorised?

Family offices come in many shapes and sizes. For the person responsible for a family’s investment activities, a question which commonly arises is whether those activities amount to regulated financial services requiring authorisation from the Financial Conduct Authority (FCA).

A ‘family office’ can be an individual ‘principal’ investing their own assets, with input from advisers and services from brokers, dealers, and asset managers. They are a client of other firms and not usually providing anyone with a service. Consequently, they would not usually expect to be undertaking any activity which requires permission from the FCA.

The situation can become more complex as the family office scales, when the principal has employed a staff to assist with their investment activity. Often, staff are employed by an entity, with the assets held in separate structures. The team may provide services to other family members, to the founder’s pre-existing trading businesses, or companies they have invested in. The entity employing the staff may receive payments to cover its costs, paid out of the family’s assets or the vehicles which hold them. Questions arise such as whether other family members, asset-holding entities, or investee companies are ‘clients’ receiving investment advisory, portfolio management, or other regulated investments services, or whether the office has become a ‘dealer’ in investments.

The line between straightforward personal investing and the creation of a financial services business necessitating regulator authorisation can be a grey area. The relevant laws and regulations do not offer a very clear answer: there is no definition of ‘family office’ in UK financial services regulation, nor exemptions or ‘safe harbours’ expressly for family offices.

The regulatory perimeter and family offices

To be regarded as carrying out regulated activity under the Financial Services and Markets Act 2000 (FSMA), one must be doing so ‘by way of business’.

For investment-related activities, this test is whether one is ‘carrying on the business of engaging in’ the activity of providing investment advice, arranging, or portfolio or fund management services. This requires a fact-based judgement, taking into account factors such as the frequency, scale, relative importance and, of particular relevance to family offices, the presence of a commercial element. A family office might consider that a commercial element is not present based on the personal nature of the relations between family members, that they do not seek-out paying clients, and other factors.

There are no specific exclusions in FSMA or the related Regulated Activities Order for family offices. However, there are certain general exclusions, for example concerning intra-group services or activity-specific exclusions such as, in relation to the activity of ‘dealing as principal’, the absence of holding oneself out as a market-maker.

As such, some family offices conclude that the application of the business test and/or applicable exclusions means that they do not require regulator authorisation to undertake their investment activities. Typically, a single-family office sees itself as a client of others in the marketplace and an investor for its own account, rather than a service provider to third parties.

Regulatory risk areas for the Single Family Office

There are several ways in which a principal or their investment team could shift the fundamental character of the office in a way that brings it within the perimeter of financial services regulation, requiring FCA authorisation. Some of the particular risk areas include:

• Family offices are often established by entrepreneurs who have successfully built businesses. This creative talent combined with the fact that investment teams are expensive, makes it tempting to monetise them by providing paid-for services to other investors, such as advice or finding investments, or investing their money for them. While these people may be friends or well-known investors, charging for services to non-family members may change the character of the enterprise into that of an investment services firm.
• Bringing-in co-investors: care is required when inviting co-investors into investment opportunities. For example, if their investment is passive and the family office is remunerated in some way, it risks inadvertently arranging deals in investments, managing investments, or establishing and operating a collective investment scheme.
• If venture capital investments are made into companies, the principal or their staff may be engaged to source additional equity or debt capital for them. Being financially rewarded for doing so may amount to ‘arranging deals’ in investments.
• Investee companies might also retain the services of a principal or their staff to provide advice. This makes sense where the principal has great experience in their industry. Advice on commercial strategies and operations is usually not a regulated activity under FSMA but if the principal advises on investments in other companies, this might amount to ‘advising on investments’, unless an exclusion applies.
• Wealthy individuals are often asked for loans by friends, for personal purposes or to buy houses. Care must be taken here to avoid inadvertently making regulated loans or mortgages.
• Providing a source of particular securities to buyers or sellers at prices offered by the principal or office might amount to ‘dealing as principal’ – in effect becoming a market maker in those securities.

It is important to be aware of these and how other commercial efforts might equate to undertaking regulated activities, and to either organise them in a way which lawfully avoids them constituting regulatory activities, avoid the activity altogether, or to become authorised by the FCA or partner with a ‘regulatory host’ firm.

Regulatory hosting is an alternative to being directly authorised by the FCA, where an FCA-authorised firm takes responsibility for the intended regulated activities. This ‘hosting’ is offered as a paid-for service and, in its different forms, can facilitate the providing of investment advice, arranging or managing investments, and fund management.

If you have questions or concerns about your family office regulation, please contact Simon Sutcliffe. Simon advises family offices on when activities will amount to ‘regulated activities’ under FSMA, approaches to lawfully falling outside of the regulatory perimeter, and where necessary, becoming authorised by the FCA or utilising the services of a regulatory host firm.

If you would like to find out more about this topic, you can sign up to Simon’s webinar here.