Founder & CEO
Given the competitive environment faced by Management Companies (Mancos), additional regulatory focus on their business functions is a challenge they must solve in order to grow and scale. Not only can third-party technology firms help ManCos digitise and streamline their existing CP86 obligations they can also assist in preparing for increased regulatory scrutiny in 2022. Here we examine the shifting regulatory landscape for ManCos and Super ManCos in Ireland and outline how technology can help with the regulatory burden.
CP86
In 2016 the Central Bank of Ireland (CBI) introduced a series of new requirements that offered a ‘framework for governance, management and oversight in fund management companies.’ Hoping to create a gold standard within the industry, the rules outlined the CBI’s expectations when it comes to six key functions of a Manco: capital and financial management; operational risk management; fund risk management; investment management; distribution and regulatory compliance. Commonly referred to within the industry as CP86, these rules came into effect for new firms in 2017, while existing firms had to comply from 2018.In a thematic review released in October 2020, Derville Rowland, Central Bank Director General of Financial Conduct, said that ‘too many firms evidenced significant shortcomings.’ She added that, ‘The lack of attention to issues that affect good governance is unacceptable and raises serious concern.’ 358 Irish Mancos had failed to properly implement the framework or could only show limited changes, the regulator said. Follow-ups with firms where shortcomings were identified were forthcoming.On September 10, 2021, the Central Bank published new UCITS and AIFMD Q&As clarifying its resourcing expectations for new and existing so-called third party or white-label management companies (Third-Party Mancos). With the CBI plans to review CP86 again in 2022, third party ManCos can expect much more scrutiny in the months ahead.In this article we examine the six areas that ManCos must digitise in order to prepare for increased regulatory scruitny.
1. Capital and financial management
Mancos and their designated persons are expected to oversee and report on capital and financial management. This includes completion and filing of annual reports, capital adequacy reports, reporting to competent authorities (sub-fund returns, KIIDS, Annex IV), and reports on the valuation of assets.For Super Mancos, an important consideration is how they can streamline and improve their reporting processes overall – including their regulatory compliance and reporting. It is clear that end to end process automation is a critical success factor to meet this aim.
2. Operational risk management
The CBI expects Mancos to conduct a wide range of tasks when it comes to operational risk management. These include: maintenance of risk management policies and processes, maintenance of a business continuity policy and disaster recovery, appointment of a prime broker, delegation monitoring, and on-site meetings and due diligence.The CBI to date has reported an overreliance on a group-wide framework, policies or procedures, without the necessary evidence to show entity specific proper engagement and due diligence. Going forward, companies should be able to show that there has been ample due diligence, regular ongoing reviews, and regular engagement or visits when delegating important tasks or functions.
3. Fund risk management
The risk management of funds is another core role of Mancos and their designated persons. These tasks include monitoring of investment policies, risk-profiling and exposure (VaR, back-testing), leverage monitoring and stress testing. According to the guidelines, funds should be doing liquidity stress tests on an annual basis at least, but there is a clear recommendation to perform it quarterly. Additional factors, including the asset classes and their liquidity, means that there’s no one size fits all and both investment managers and Mancos should assess the need to test – and how they test – on a case by case basis.Funds require clearly documented procedures and practices that go beyond testing and risk-profiling. Governance, including clear escalation paths and clearly defined roles and responsibilities, has become a crucial part of fund risk management – and something Mancos must be acutely aware of going forward. Automated task management, compliance workflows, escalation alerts and workflows and documentation management in a single technology platform are key to ensuring a robust and systematic approach to the regulatory requirements.
4. Investment management
Mancos and designated persons are also expected to oversee and report on investment management. This may include due diligence of the investments, as well as ongoing leverage and liquidity oversight, margin and collateral considerations and voting rights strategies and execution.Mancos make sure the fund type and portfolio reflect the fund’s strategy and its prospectus. Investor requirements and risk appetite should be fully met, while certain rules (for example: no more than 10% in one security for a UCITS fund) are also implemented. These rules can change frequently, such as AIFs and UCITS needing to report their short selling activities if it’s greater than 0.1% following the Covid-19 crisis. Automated investment rules ensure that a ManCo can scale and keep its business up to date in this area.
5. Distribution
The fifth expected role is distribution. Mancos should oversee any sales flows in the current pipeline, any proposed new developments and initiatives (such as passporting), and should be aware of any legal, regulatory, tax or other compliance issues. While most Mancos will be well versed in the laws around passporting under the UCITS and AIFMD regimes, for example, there are subtle differences between jurisdictions when it comes to marketing materials.
6. Regulatory compliance
The final role identified by the CBI is regulatory compliance, a role that continues to evolve as the EU regulatory landscape grows ever more demanding and complex.For Mancos, this may include: authorisation, compliance with regulations (UCITS, AIF, Annex IV, Liquidity Stress Tests), regulatory risk monitoring, depository oversight, remuneration policies and procedures, investor disclosures and senior management oversight.For Mancos or Super Mancos operating in multiple jurisdictions, there is a need to streamline regulatory reporting and operate from a single, standalone platform that provides a birds eye view and a golden source of data.
Digitise and grow
A fully integrated back, middle and front office technology platform can help Mancos cope with their diverse requirements, including pre and post-trade compliance, performance reporting, and regulatory reporting, across multiple jurisdictions. This can save on IT and headcount, allowing Mancos to focus on their core service capabilities, while offering key regulatory assurances.A trusted technology partner can ensure a ManCo is at the cutting edge of innovation, future proofing the ManCo. Third-party technology partnerships are important for Mancos to stay ahead of the regulatory and technological curve. Regulatory technology platforms are designed specifically with regulations such as CP86 in mind. With the harmonisation of AIF and UCITS on the regulatory roadmap, not to mention SFDR, a single point solution for CP86 is not sufficient, a holistic technology platform is needed.With the CBI putting companies on notice and promising to review CP86 again next year, Irish Mancos have little time to ensure that they’ve fully implemented the regulations. As the competition amongst the industry continues to heat up, finding the best technology platform in the market is one way a ManCo will ensure it is always fully compliant and ahead of the crowd.