MIFIDPRU 4.7 K-AUM requirement

1The definition of AUM does not include any amounts arising from the firm’s provision of the ancillary service in paragraph 3 of Part 3A of Schedule 2 to the Regulated Activities Order (i.e. providing advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings).

1. (1)

   1The effect of MIFIDPRU 4.7.5R(2) is that when measuring the value of AUM at the end of each month, a firm must apply the relevant conversion rate on that date to the AUM attributable to that month. The AUM for each relevant preceding month should continue to be measured by reference to the conversion rate that was applicable at the end of that particular preceding month.

2. (2)

   For purposes of MIFIDPRU 4.7.5R(3), where a firm is carrying out a conversion that involves sterling, the FCA considers that an example of an appropriate market rate is the relevant daily spot exchange rate against sterling published by the Bank of England.

1. (1)

   1MIFIDPRU 4.7.8R and MIFIDPRU 4.7.9R apply where one entity delegates management of assets to another entity. For these purposes, delegation involves a delegating entity (“A”) assuming a duty to the relevant client to manage the assets, and A then delegating the performance of that duty (in whole or in part) to another entity (“B”).

2. (2)

   The following are not delegation for the purposes of MIFIDPRU 4.7.8R or MIFIDPRU 4.7.9R:

   1. (a)

      where A only arranges for B to provide a service directly to a client, so that B owes a duty directly to the client to manage the assets and A does not; or

   2. (b)

      where A advises a client to use B’s management services for the client’s assets, but A does not assume any responsibility to the client for managing the assets.

3. (3)

   MIFIDPRU 4.7.8R states that a MIFIDPRU investment firm cannot reduce its AUM by delegating management of assets to another entity. This is because the firm will normally continue to owe a duty directly to the client, even if performance of that duty has been delegated (wholly or partly) to another entity.

4. (4)

   However, MIFIDPRU 4.7.9R(1) permits a firm to which the management of assets has been formally delegated to exclude the value of the assets when measuring its AUM if the delegating entity is a financial entity. However, if the delegation does not meet the requirements to be a formal delegation, the firm may not exclude the relevant assets from its measurement of AUM. The definition of a financial entity covers:

   1. (a)

      entities that are subject to an AUM-based capital requirement that is similar to the K-AUM requirement;

   2. (b)

      an insurance undertaking that forms part of the same financial conglomerate as the firm if the FCA is the coordinator for that financial conglomerate; and

   3. (c)

      an undertaking that is part of the same investment firm group as the firm, provided that the investment firm group is subject to prudential consolidation under MIFIDPRU 2.5 and both entities are included within the resulting consolidated situation of the UK parent entity of that investment firm group.

5. (5)

   MIFIDPRU 4.7.9R(1) is a limited exclusion that applies where assets under management have been delegated to the firm by a financial entity. This reflects the fact that the financial entity will either have a minimum AUM-based capital requirement or the FCA will have additional supervisory powers to take into account the position of the financial entity because it forms part of the same financial conglomerate or prudential consolidation group as the firm. However, even where a financial entity is included within the same financial conglomerate or investment firm group to which MIFIDPRU 2.5 applies, MIFIDPRU 4.7.9R(1) may be disapplied by MIFIDPRU 4.7.9R(2) for sub-delegation arrangements. This is because extended chains of delegation may involve additional operational risks.

6. (6)

   MIFIDPRU 4.7.9R(2) applies if a firm is managing a portfolio under sub-delegation arrangements. Its effect is illustrated by the following example: Firm A (a third country entity that is a financial entity) formally delegates the management of a portfolio of assets to Firm B (a MIFIDPRU investment firm). Firm B formally sub-delegates the management of part of the portfolio to Firm C (another MIFIDPRU investment firm). Firm B may apply the exclusion in MIFIDPRU 4.7.9R(1), on the basis that Firm A is a financial entity. However, if Firm B applies the MIFIDPRU 4.7.9R(1) exclusion, Firm C cannot also exclude the value of the sub-delegated assets from Firm C’s measurement of AUM. This is because MIFIDPRU 4.7.9R(2) disapplies the MIFIDPRU 4.7.9R(1) exclusion if the delegating entity has already applied a similar exclusion in relation to the same portfolio.

7. (7)

   MIFIDPRU 4.7.9R(2) also applies if the delegating entity is a financial entity in a third country and is applying an equivalent exclusion. For example, Firm D (an entity in a third country) delegates the management of a portfolio to Firm E (a financial entity in a third country). Firm E sub-delegates the management of part of that portfolio to Firm F (a MIFIDPRU investment firm). The third country rules to which Firm E is subject permit Firm E to exclude the value of the assets delegated by Firm D from Firm E’s AUM-based capital requirement. If Firm E is relying on that exclusion, Firm F cannot rely on the exclusion in MIFIDPRU 4.7.9R(1).

1Where a financial entity (“A”) provides investment advice of an ongoing nature to a MIFIDPRU investment firm (“B”) and B undertakes discretionary portfolio management, the arrangement does not fall within MIFIDPRU 4.7.9R. This is because the arrangement is not a formal delegation of the management of assets by A to B, but involves 2 distinct activities: ongoing investment advice provided by A and discretionary portfolio management undertaken by B. In this situation, if A is a MIFIDPRU investment firm, it must include any assets in relation to which it is providing the advice in its measurement of AUM. Where B undertakes discretionary portfolio management in relation to the same assets, B must also include those assets in its own measurement of AUM.

1MIFIDPRU 4.10.26G to MIFIDPRU 4.10.32G and MIFIDPRU 4 Annex 12G contain additional guidance on the interaction between the measurement of a firm’s AUM and the measurement of a firm’s COH.

1. (1)

   1The definition of investment advice of an ongoing nature includes:

   1. (a)

      the recurring provision of investment advice; or

   2. (b)

      investment advice given in the context of the continuous or periodic assessment and monitoring, or review of a client portfolio of financial instruments, including of the investments undertaken by the client on the basis of a contractual arrangement.

2. (2)

   In either case, the firm must provide investment advice as part of the relevant arrangement. This means that the firm must provide a personal recommendation to the client. Therefore, where a firm merely provides generic advice to a client that does not result in a personal recommendation, the firm does not need to include the value of any assets that are the subject of the generic advice in its measurement of AUM. Firms should refer to the guidance in PERG 13.3 for further information on investment advice, personal recommendations and generic advice.

3. (3)

   For example, a firm may undertake a periodic review of a client’s portfolio to assess whether the balance between investments in equities and fixed income products is appropriate. If the firm advises the client only in general terms to invest a higher proportion of the portfolio in equities and a lower proportion in bonds, this would not normally constitute investment advice, unless the firm also gave advice on investing in specific equities or bonds. Provided that the firm does not give advice relating to specific investments (i.e. a personal recommendation), it therefore would not need to include the value of the portfolio when measuring its AUM.

1. (1)

   1When giving investment advice of an ongoing nature, the assets that the firm must include within its measurement of AUM will depend on the scope of the firm’s obligation to provide investment advice.

2. (2)

   In some circumstances, a firm may have assumed a duty to provide investment advice in relation to the client’s entire portfolio. For example, a financial adviser may agree to carry out periodic reviews of a client’s entire portfolio and to make recommendations to the client about the specific financial instruments in which the client should invest. In that case, the firm must include the entire value of the client’s portfolio (to the extent that the portfolio consists of financial instruments) in the firm’s measurement of AUM. This is because the firm has assumed a duty to provide investment advice of an ongoing nature in relation to the entire portfolio.

3. (3)

   In other situations, the scope of the firm’s duty to provide investment advice may be more limited. For example, a firm may agree with a client that the firm will provide investment advice only on a particular subset of assets or only when specifically requested by the client. In that case, the firm’s duty to provide investment advice of an ongoing nature is limited to the relevant subset of assets, or the specific financial instruments in respect of which the client requests advice. Therefore, the firm would be required to include only the value of those particular assets or financial instruments when measuring its AUM.

4. (4)

   A firm may have assumed different duties in respect of different parts of a client’s portfolio. For example, a firm may have agreed to carry out a general review of whether the client’s portfolio is appropriately balanced in a manner that would constitute only generic advice, rather than a personal recommendation. However, the firm may also be under a duty to provide investment advice on the equities held within the portfolio. In that case, the general review would not constitute investment advice (as it is only generic advice) and therefore the firm does not need to include the entire value of the client’s portfolio in the firm’s measurement of AUM. However, as the firm does have an ongoing duty to provide investment advice in relation to the equities held in the portfolio, the firm must include the value of those assets within its measurement of AUM.

5. (5)

   Where a firm provides recurring investment advice to a client without assuming a continuing duty, the firm is only required to include the value of the particular financial instruments in respect of which it provides investment advice in the firm’s measurement of its AUM.

1. (1)

   1Investment advice of an ongoing nature includes arrangements involving periodic or continuous investment advice and arrangements involving recurring investment advice.

2. (2)

   Periodic or continuous investment advice is most likely to arise where a firm agrees with a client that the firm will keep the client’s portfolio under review or will provide advice to the client at various points during a specified period. For example, a firm may agree to manage a client’s portfolio on a non-discretionary basis so that the firm has an ongoing duty to make personal recommendations to the client, but the client decides whether to proceed with each transaction. Alternatively, the firm may agree with the client to review the client’s portfolio on, for example, a quarterly basis and to provide the client with personal recommendations following each review.

3. (3)

   Recurring investment advice does not require the firm to have assumed an ongoing or periodic duty to provide investment advice to the client. Instead, the firm provides investment advice to the same client repeatedly, even though there is no agreement with the client to establish a formal ongoing relationship. When considering whether investment advice is recurring for these purposes, a firm should assess whether, in substance, the type and pattern of advice that it provides is similar to periodic or continuous advice. This means that a firm cannot prevent what are, in substance, ongoing advisory arrangements for a client from constituting investment advice of an ongoing nature by artificially separating them into multiple individual agreements to provide advice to that client. If requested by the FCA, a firm should be able to justify why the firm has concluded that a particular set of advisory arrangements with a client does not constitute investment advice of an ongoing nature.

4. (4)

   Investment advice of an ongoing nature does not include genuinely isolated or sporadic instances of investment advice provided to the same client that do not, in substance, amount to ongoing arrangements. However, a firm should assess the potential harms arising from any investment advice that is not investment advice of an ongoing nature as part of its ICARA process.

1. (1)

   1Where a firm provides investment advice in the context of the continuous or periodic assessment and monitoring or review of a client portfolio of financial instruments, the value of AUM that the firm includes in respect of that portfolio should be determined by the scope of the firm’s duty to the client.

2. (2)

   If the firm is under a duty to review the client’s entire portfolio and provide investment advice as a result, the value of all financial instruments in the portfolio should be included in AUM. If the firm’s duty is limited to specific financial instruments, only those financial instruments need to be included in AUM.

1The requirement in MIFIDPRU 4.7.18R(2) is illustrated by the following example:

1. (1)

   On 1 March, the firm reviews the client’s entire portfolio of financial instruments and provides investment advice to the client. The value of the client’s portfolio is 100 on that date. The firm is required to carry out its next review of the client’s portfolio on 1 June. The firm would include a value of 100 in its AUM for each of March, April and May.

2. (2)

   On 1 June, the firm reviews the client’s entire portfolio again and provides further investment advice to the client. The value of the client’s portfolio on that date is 110. The firm would include a value of 110 in its AUM for June and each subsequent month until the time of the next review, or until the firm’s duty to carry out a review of the client’s portfolio ends (if earlier).

1. (1)

   1Where a firm provides recurring investment advice to a client, the value of AUM that the firm must include in respect of that client should be measured by the value of the financial instruments that are the subject of the relevant investment advice.

2. (2)

   Under MIFIDPRU 4.7.5R, to calculate its average AUM, a firm must take the 15 most recent monthly values of AUM and exclude the most recent 3 months before calculating the arithmetic mean of the remaining values. MIFIDPRU 4.7.21R explains how a firm should measure the monthly value of AUM when it is providing recurring investment advice to a client.