The UK government is committed to using private capital to boost innovation and productivity. The UK’s finance minister, Rachel Reeves, has recognised the importance of British venture capital to that mission and the government insisted that the regulators take steps to align their rulebooks with the policy goal of competitiveness and growth.
But what happens when the rubber hits the road? Proposed reforms to one of the industry’s core regulatory advantages – the “appointed representative” (or AR) regime – may put these well-intentioned pledges to the test.
The AR regime really does matter. It is pro-business and pro-competition. For decades, it has helped first time fund managers get to market quickly and has reduced their up-front costs. Early suggestions of its abolition were met with consternation and the latest proposals suggest that the UK regulator, the FCA, is listening to feedback.
Usually, a person who carries on regulated activities in the UK must be authorised by the FCA. The AR regime is an exception to this rule because an already authorised firm (the Principal) accepts responsibility for the AR’s regulated activities. The AR carries on its activities relatively independently from the Principal, but the Principal must oversee the AR in line with FCA rules and guidance. That Principal oversight has been enhanced in recent years.
Communicating with LPs is likely to involve a regulated activity and so VC managers need regulatory cover in order to raise and market a fund in the UK. However, VC emerging managers launching their first fund may not have the bandwidth for the cost and time involved with obtaining FCA authorisation so they often rely on the AR regime. This enhances their speed to market for their first fund and is a useful temporary platform while they build up the resources should they wish to apply for FCA authorisation.
Under the AR arrangement, a VC emerging manager would only be able to provide transaction arrangement and investment advisory services and would not be authorised to manage and run their funds. The AR regime doesn’t extend to these activities and so the VC emerging manager will usually appoint an authorised third-party (a “host”) to act as the fund manager, with the VC emerging manager providing investment advice to that host in reliance on the AR exemption. Nine times out of ten, the Principal and the host are part of the same third-party provider’s business.
The AR regime really does matter. It is pro-business and pro-competition.
