Running your own fund - FSA Regulation

[jls483]

I have a friend - let's call him John. He is interested in running a fund so that his family and mates can invest in it. He's phoned up the FSA and they've told him that he will need to be regulated/authorised and that it costs £2000 initial fee and an annual charge as well. He has no idea how complex regulation is.

I, sorry, he fills in his own tax return - but expects the forms to be a little more complicated.

Has anybody else been through this process? Do you know how much it really costs? Can a newcomer handle the process themselves or will they need professional help? Is it possible to get a consultant to do it for you? What are the time and money costs of ongoing compliance?

Would anybody be interested in mentoring me, sorry him, in return for a small fee?

Many thanks,

John.

 

[zebra]

Usually, your friend would be sponsored by a firm of brokers or investment house before attempting to become authorised by the FSA.

The required study courses are very rigorous and normally takes about 3 years to complete for study time, examinations (many). If time permits and he is really serious, he could do it in less time but frankly, it's hardly worth while for just family, friends et-al.

The easy route is to find a good firm of brokers who will take his direction, on an execution only basis.

 

[wysinawyg]

Don't even think about it. Absolute last thing in the world you want is to be registered. Much better to find a solicitor to set up a private fund for you (no idea who would do it though, try phoning round a few mid/large firms or looking at http://www.solicitors-online.com/ ). You're limited to about 20 people or so and you have to know them all, but you'll actually be able to do it whereas you'll never manage to deal with the compliance etc. to get properly registered.

wysi

 

[Airthrey Capital]

Firstly, in order to become FSA regulated, you will need to meet a number of criteria.

The most basic is that you will have to pass an exam in order to show that you are qualified / knowledgeable about the markets you intend to invest in.

The exam you will need to sit is the Registered Representative exam. This will allow you to undertake transactions on behalf of your compliance. The exam also requires you to learn a great deal of regluatory detail relating to the Financial Services Act (money laundering / capital adequacy / reporting/authorisation etc.)

You can get more details about the exams from the Securities Institute.

Once you have passed the exam, you will also need to register with the FSA. They will check that you don't have a criminal record, that you are not a bankrupt, that you do not have a poor credit history. Basically, they have to decide that you are a "fit and proper person" (their words, not mine).

You will then need to set up a company which itself needs to be registered with the FSA. They will come and visit you and ensure that you have all the necessary kit / procedures in place to ensure that you remain compliant (like segregating client funds etc, risk controls, reporting procedures).

SFA registration for a new company can take about 6 months.

It can be done without help from consultants (I have done it myself), but I wouldn't recommend it.

All in all, it can be an expensive process. Even large institutions (such as HSBC) have complained about the heavy costs and burdens of over-regulation (these guys have expensive compliance departments purely to ensure they continually meet FSA requirements).

You will need to be really serious about running a fund (even for friends) in order to do things legally, The penalties are severe if you don't.

NB......Every reference to "you" in the above clearly relates to your friend "John" of course!

 

[MCGF]

Sounds too much effort for too little gain personally

 

[jls483]

Thank you WYSI, Blairlogie and Zebra - you obviously know what you are talking about.

Wysi - I am particularly interested in this private fund concept. Does such a legal entity exist - where can I find out more about it? What are the restrictions? I'd be more than happy to run my own private hedge fund - I could try it for a few years before deciding whether it made sense to go for the big time. Presumably my mates would not be able to purchase my fund within their ISA ...

The FSA were happy for me to trade on behalf of one mate, but as soon as it became two then I had to be authorised. And non-compliance could lead to a fine of up to £1m and 2 years in jail!

John.

 

[eminem]

If you are considering a private fund would it be worth looking into offshore jurisdictions and along with that you "may" then avoid the FSA issue??

 

[MCGF]

£1 million and a two year prison sentence! Ur kidding right?

 

[wysinawyg]

<i>Wysi - I am particularly interested in this private fund concept. Does such a legal entity exist - where can I find out more about it? What are the restrictions?</i>

Basically you just set up a company with a handful of shareholders and the right rules. You'll need a solicitor to set up the company, do the offer and let you know what you can and can't do and an accountant to do the books. You'll also need to sort out the broking for it although pretty much anyone will do a company account (although you might have to give a guarantee, I'm not sure).

That company then goes on to invest the money. You can't advertise publically for shareholders and have to be careful about offers and things. Not something I really have any experience in so the best idea for specifics is just to phone round some law firms in your area that show up on the above site as having "Financial and Investment Services" expertise. Make sure they've done it before though as otherwise you're likely to get gouged on fees as they charge you for working out how to do it.

<i>I'd be more than happy to run my own private hedge fund - I could try it for a few years before deciding whether it made sense to go for the big time. Presumably my mates would not be able to purchase my fund within their ISA ...</i>

For your mates to purchase the shares in an ISA you'd need an LSE listing or be a properly regulated fund.

wysi

 

[hellvellen]

Better bet may be a properly constructed investment club. Thousands exist and as long as the general invesment mandate does not prohibit spread betting you could be okay.

Which markets would you intend to follow?

 

[jls483]

MCGF - That is the maximum fine - not the minimum.

hellvellen - the constitutions of investment clubs forbid any one member benefitting financially from the other members. I will initially trade the FTSE, but have plans to expand (if I'm not in prison).

wysi - I already run my own limited company so it won't be too difficult for me to create a new one. Essentially what you are saying is that instead of buying units in a fund, my mates buy shares in the company. They will then receive dividends as company dividends. I don't think I can open a spreadbet account as a company - so I will just trade futures instead. There was no way that they could receive company dividends tax free so spreadbets are no longer so interesting.

What makes you think that as an individual I would have to be regulated, but as a limited company I am exempt. Anything I can say to them as I am being carted off to the slammer?

Many thanks,

John.

 

[anley]

You don't need to be registered by the FSA for what you want to do.

Interactivebrokers have the perfect account for you, 'Friends & Familly'.

 

[Scripophilist]

Is there a site therefore that allows you to define exacly when you need to be regulated by the FSA. I am asked for advice and to manage money all the time but have never considered it for a variety of reasons. I've no idea where the line is drawn.

 

[jls483]

Thanks Anley - very interesting. From what I can see it allows me to trade on behalf of up to 15 friends and family. This is not exactly what I want to do - I want to have a single account which friends and family all own a share in.

I'll phone interactive brokers in the morning and see if there is something that can be done.

Thanks again,

John.

 

[wysinawyg]

You don't need to be registered by the FSA for what you want to do.

Interactivebrokers have the perfect account for you, 'Friends & Familly'.

The problem there is he'd be managing other peoples money for personal profit which AFAIK (and see below) is a regulated activity (he isn't planning on doing this out of the kindness of his heart from what I understand).

The magic of the company process (as I understand it) is that you are no longer managing anyone's money, you are just employed by the company to buy and sell things on its behalf and hopefully make a profit. There are bound to be loads of ways to slip up though so you do need some proper legal advice. I think you're wrong on the inability to open a spread betting account, but probably right on it being taxable and hence not really worthwhile. If you're putting together a sizeable wad a direct access account with IB seems the most sensible thing unless you need a bit more hand holding / service for some reason.

Scrip - Authorisation is basically governed by the Financial Services and Markets Act. Have a look here:

http://www.fsa.gov.uk/fsma/data/fsma/act/act_index.htm

which is the FSA's slightly out of date version. Mainly clause 22 and Schedule 2 for what you're after. Its pretty wide ranging if you're doing it by way of business (i.e. with personal profit in mind).

wysi

 

[jls483]

Forgive me if I am being a bit dim wysi - but aren't companies entities that need to be regulated as well? I can see that as an individual I won't need to be regulated but surely the company that I am working for will. Just like Fidelity needs to be.

I find it hard to believe such a simple loophole exists.

John.

 

[wysinawyg]

<i>Forgive me if I am being a bit dim wysi - but aren't companies entities that need to be regulated as well? I can see that as an individual I won't need to be regulated but surely the company that I am working for will. Just like Fidelity needs to be.</i>

Companies do need to be regulated but it depends what they do. In the above scenario nobody is "managing" funds anymore. The investors have just invested money in the company, the company is running a trading business and "John" is just employed by the company to do the trading.

In the case of Unit Trusts you'll have a fund and then a separate management company (i.e. Fidelity) who then manage money on behalf of the fund. I think Investment companies work the same way in that the funds are set up and generate a pool of cash which is then given to a management company to invest (although I'm a little less sure on that one).

Anyway, its not a structure I've set up so I don't know the ins and outs of how it works and quite why it is legal (which is why I keep emphasising you need to get it checked out), I just know that it has been done with blessing from a law firm. To be quite honest for all I know there is a specific paragraph in a piece of legislation somewhere saying that this is okay even though it shouldn't be (like the one that says derivatives trading isn't gambling even though it fulfils all the legal definitions of being gambling).

wysi

 

[jls483]

ok thanks - I'll look into it

John.

 

[scrappy]

A colleague of mine did the same thing about two years ago. To avoid the FSA thing he set up a "Share Club". Where a few members had put in money and allocated responsability for buying and selling shares on him.

I don't know the full jist of it but I am sure there are a few traders trading this way.

I will give my friend a call and try to get some more details of him.

 

[anley]

Whatever you do if you go down the FSA route or even have a chat with them so they know who you are, you're in trouble. They'll likely put up many road blocks in front of you and cause you to burn through a chequebook.

Another way around it which may have been mentioned is to trade through a company where the investors are shareholders. In this case you don't have to registered either as it is just a simple corporate account.