Challenges facing ManCos – more regulations, more regulatory change, and more scrutiny than ever before (Part 1)
The pressure is rising on the ManCo industry – Management Companies (ManCos) are dealing with more regulations, and more regulatory change than ever before. This constant churning of regulatory change, coupled with increased scrutiny from regulators has led to a complex, pressured regulatory environment.
However, this increased scrutiny is not the only challenge facing Mancos!
The use of ManCoTech – technology that automates ManCo compliance processes – has the power to address many of the below challenges facing ManCos.
Challenges facing ManCos
Inhouse solutions can often be slow to react to regulatory change, meaning internal solutions are constantly solving yesterday’s regulatory problems. Technology companies by their nature are forward looking and agile, allowing them to respond quickly to changing regulatory priorities.
In recent years, we’ve seen:
- The Central Bank of Ireland’s Fund Management Company Guidance in December 2016;
- Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF) Circular 18/698 addressing many of the same areas as that of the CBI;
- The FCA AFM review and
- The EU AIFMD review.
We’ll look at the above further in part 2, but it’s clear even from these few examples, that there is now more scrutiny on substance, capital, internal controls and delegation than ever before.
ManCoTech can help ease the burden of compliance and increased scrutiny from regulators by providing greater accuracy and increased efficiency, whilst continually meeting regulatory change.
The asset management industry has been very profitable in the past, however, increasing fee competition, increasing regulatory costs, substance requirements increasing the required headcounts, are all contributing factors to the cost pressures faced by ManCos.
There are strong financial arguments for implementing ManCoTech, however, for some, the perceived high expense can be a deterrent. Justifying the implementation of ManCoTech must go beyond merely the potential costs savings through increased productivity and efficiency via automation, but also the enhancements in compliance and reduced risk of manual failings.
ManCos are merging – recently we have seen a number of mergers / consolidations. With these mergers, we are seeing next-generation Super ManCos providing a huge range of offerings – from compliance and company secretarial requirements, to data management services alongside the core ManCo business. ManCos need to expand into new services to stay ahead of the competition.
Increasing client expectations is a further challenge for ManCos – to remain relevant and appealing to current clients and prospects, ManCo must increase their capabilities and offerings. This can be achieved through embracing technology.
For even the simplest funds, the amount of data required to comply with regulations has become huge. This has led to a multitude of problems, not least of which includes:
- Data overload
- High costs of maintaining large amounts of data
- Difficulties extracting the relevant information from the data in a timely manner.
Technology is a must to successfully comply with the unwieldly plethora of regulations and the data requirements that comes with it. ManCoTech allows firms to handle large, complex and time-critical data demands across multiple entities and jurisdictions.
COVID-19 created a number of challenges for management companies, particularly with their risk management function which had to deal with the large redemptions and liquidity risks arising due to the market volatility seen in March 2020.
ESMA recently published the results of the Common Supervisory Action on UCITS liquidity risk management – in the report, ESMA noted that were the Liquidity Risk Management function was delegated, there was insufficient delegation monitoring and due diligence.
Furthermore, the ESMA Guidelines on liquidity stress testing in UCITS and AIFs provides that ManCos should avoid reliance on or influence by the delegated portfolio manager’s own Liquidity Stress Testing. Therefore, any ManCos which appoint an investment manager to manage the assets of a fund should ensure that the delegated portfolio manager provides them with adequate information to allow them to conduct appropriate Liquidity Stress Testing.
ManCos will continue to face greater scrutiny and increased regulatory focus on liquidity, and must ensure they have a robust liquidity risk management framework in place, taking into account the nature, scale and complexity of the funds(s) under management.
Regulation is showing no signs of slowing down – when firms operate in several geographies and multiple lines of business, this becomes even more challenging.
With Asset Managers opting to rely on Super ManCos to hold the appropriate licenses to distribute funds internationally, ManCos must have the ability to navigate complex regulatory environments and cross border challenges. ManCoTech offers the necessary solution for ManCos to accommodate for multiple jurisdictional requirements.
While there are also costs and challenges associated with implementing ManCoTech, used well, it has the potential to:
In a world of ever-increasing compliance demands, firms with a clear understanding of ManCoTech, its potential benefits, and how to implement it effectively, have an opportunity to gain an advantage in terms of costs, risks and revenues.