ManCo 2021 mid-year update – regulation underlines the need for scale

One of the most significant pieces of regulation implemented in early 2021, was the European Union’s Sustainable Finance Disclosure Regulation (SFDR), which came into effect on March 10.

The regulation mandates additional disclosure from a wide range of fund structures, including UCITS and AIFs, both at a firm and product level.

This additional focus on environmental, social and governance (ESG) factors doesn’t just add to the workload of the fund managers. It adds to the burden of those working in the back office and the middle office. The ramifications cover distribution, custody, and a host of other processes.

Prior to the introduction of the regulations, many investment managers lacked an understanding of the implications of SFDR for their business. They required urgent support to comply with the reporting demands.

SFDR highlights that we are entering a new era in fund regulation; the previous focus was all about market transparency and stability and was triggered largely by the financial crisis. This stream of regulation is certainly not complete (see the Irish update below), but now we are getting an additional focus on ESG issues and the drive to use finance as a force for sustainability.

Another landmark date in the diary was the end of the first quarter of 2021, the deadline given for AMCs to comply with Bank of Ireland’s thematic review on governance, management, and oversight.

This framework dates to 2017-18 and covers issues ranging from delegated oversight to risk management to requirements for local staffing. The Bank of Ireland is losing patience with AMCs who are failing to implement the new processes, as evidenced in a letter it sent out last October with a long list of ways AMCs had fallen short of the new requirements. It noted “significant shortcomings were identified in relation to how some designated persons discharge their role” and “some firms were unable to evidence that they had carried out the appropriate level of due diligence on their delegates.”

These two regulatory developments have very different themes and aims, but they both underline a key issue: as regulatory complexity continues to mount, the scale required to comply, requires significant resource. Those firms with either limited internal resources or small third-party providers will struggle to comply and thrive in this new environment. For those firms using third party ManCos for instance, only those with significant scale can ensure their clients are up to date. A large, experienced ManCo has the resources to understand new regulation fully and brings that knowledge to each client’s unique position, rather than using an ‘off the shelf’ approach.

For those using Luxembourg as a fund jurisdiction, this has been clear since 2018, when Circular 18/698 from the Commission de Surveillance du Secteur Financier (CSSF) set out more demanding capabilities from ManCos which would be challenging to meet by any ManCo without critical mass and scale.

Traversing the tech terrain

As well as adapting to new regulation, only ManCos with scale can handle the other major force affecting AMCs: technology.  A good example of how a ManCo with real scale can help AMCs with both challenges is our Invest Check product.

Invest Check is underpinned by Apex’s proprietary software and simplifies the process of regulatory alignment through robust ESG data collection, benchmarked against best-in-class international regulations and standards defined by SFDR, Taskforce on Climate-Related Financial Disclosure (TCFD), United Nations Principles for Responsible Investment (UNPRI) and more.  

Invest Check evaluates an asset manager’s sustainability strategy at both manager and product level, tracks performance and identifies key gaps against an ESG data set based on regulatory standards. The ESG data is then presented in an easy-to-use format that mirrors the SFDR template, streamlining the submission process for managers.

Reflecting the need for scale to serve clients better, Apex has been boosting its presence in the ManCo arena, recently completing the acquisition of FundRock, a leading independent UCITS management company and Alternative Investment Fund Manager. It follows from the 2019 purchase of Luxembourg-based ManCo LRI. Both FundRock and LRI are fully licensed Management company services. 

The issue of scale to handle regulatory change and digital disruption was highlighted further in PwC’s Observatory for Management Companies 2021 Barometer published in April, which said only larger players “have the necessary resources to respond to a heavy regulatory environment, manage increasingly complex assets, and respond to clients’ demands and needs”.

The PwC report noted Apex’s FundRock and LRI combined, were the largest third party ManCo service offering in Luxembourg. PwC ranked them as follows:

• #1 in the Overall Ranking in Third Party ManCos in Luxembourg
• #1 Third Party UCITS
• #2 for Third Party AIF

PwC’s analysis also confirmed growing revenues for ManCos and added that a trend of consolidation via recent mergers and acquisitions means there is greater concentration of market share among the bigger players.

The second half of the year will see plenty more need for AMCs to upgrade processes and technology. As a start, they must get in shape for the UK’s new Investment Firm Prudential Regime that comes into force on the first day of 2022. Other broad-based changes will impact the sector, such as the EU’s proposed Digital Operational Resilience Act, which will address AMCs’ cyber-security—another topic where a ManCo’s scale and experience can make a real difference.

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