Simon Sutcliffe, Financial Services partner at Keystone Law
Family offices come in many shapes and sizes and a common question arising is whether their investment activities are considered regulated financial services requiring authorisation from the Financial Conduct Authority (FCA).
Where a ‘family office’ is an individual ‘principal’ investing their own assets, with input from advisers and services from brokers, dealers, and asset managers, they would not usually require permission from the FCA.
However, the situation is more complex when the principal has employed staff to assist with their investment activity. The staff 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.
The line between straightforward personal investing and the creation of a financial services business necessitating regulator authorisation can be a grey area, especially as there is no definition of ‘family office’ in UK financial services regulation, nor exemptions or ‘safe harbours’ expressly for family offices.
The regulatory perimeter for a family office
Under the Financial Services and Markets Act 2000 (FSMA), an activity is regulated only if carried on ‘by way of business’.
For investment activities, this asks whether a person is in the business of providing investment advice, arranging deals, or managing portfolios or funds. It is a fact-specific assessment, that considers factors such as frequency, scale, significance, and whether there is a commercial element. A family office may argue there is no commercial context given the personal family relationship, the absence of paying clients, and other factors.
FSMA and the Regulated Activities Order include no family-office-specific exclusions. Some general exclusions may apply, such as for intra-group services, or activity-specific carve-outs (for example, in ‘dealing as principal’, not holding oneself out as a market maker).
Some family offices conclude that the business test and/or relevant exclusions mean they do not need FCA authorisation for their investment activities. A single-family office typically sees itself as a market participant investing for its own account, not a third-party service provider.
What are the regulatory risks for single family offices?
A principal or their investment team could shift the fundamental character of the to bring it within the perimeter of financial services regulation, requiring FCA authorisation. Some of the risk areas include:
- Family offices are often established by entrepreneurs who have successfully built businesses. They may seek to monetise them by providing paid-for services to other investors. While these people may be friends or well-known investors, charging for services to non-family members can change the character of the enterprise into that of an investment services firm.
- 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 could amount to ‘arranging deals’ in investments.
- Investee companies might also retain the services of a principal or their staff to provide advice. Advising 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 securities to buyers or sellers at prices offered by the principal or office might amount to ‘dealing as principal’,and therefore becoming a market maker in those securities.
Family offices must be aware of these and how other commercial efforts might equate to undertaking regulated activities, They should organise them in a way which lawfully avoids them constituting regulatory activities, avoid the activity altogether, or become authorised by the FCA or partner with a ‘regulatory host’ firm.