Oversight for European funds: How Brexit is adding to the challenge

Within the fund management community, there is a current trend into reviewing oversight processes with Brexit undeniably playing a part in this development.  With less than a year until the beginning of the transitional period, Milestone Group has been speaking with fund managers to learn more about their concerns and pressure points.

In planning for Brexit, UK and Central Europe based fund managers are dealing with the reality of running parallel fund ranges to comply with local regulatory requirements in each domicile and needing to demonstrate effective operation of the oversight function in each jurisdiction.

Although contextually important, Brexit is by no means the only force at play in the oversight saga. Recent domestic regulatory pressures, focus by fund boards and target operating model reviews are providing fresh perspectives on oversight processes. Just this April, the UK Financial Conduct Authority (FCA) released its “Business Plan 2018/19” and, in corroboration with our recent Brexit survey findings, they reinforce the importance of demonstrating independent oversight to both regulators and investors.

The findings of Milestone Group’s survey were substantial, with uncertainty arising from Brexit clearly front of mind. 96 per cent of our respondents indicated that Brexit was a key issue for them and only 30% claimed to be confident that it would not have a negative impact on the UK’s financial services industry.

More specifically, 64% of the respondents indicated that Brexit is causing their firm to reconsider its operating model leading to consideration of outsourcing certain elements of their back-office functions in response to this regulatory driven change.

With an increased focus on outsourcing of back and middle office functions, more than three-quarters of fund managers strongly agree that it is important to demonstrate independent oversight of outsourced operations undertaken by third party service providers. Funds retain responsibility to investors for any faults when they outsource so it’s crucial to ensure accuracy. You can outsource the function but not the responsibility.

Brexit may be acting as a catalyst, but recognition that an industrialised oversight function is increasingly necessary is undeniably growing.  Of respondents surveyed that have reviewed their oversight processes, over half intend to make changes to their supporting technology. Of course there will always be firms who wait for greater clarity before taking part in any reviews, but this may prove a risky strategy, particularly considering overarching industry trends.

Operational oversight has become a much greater priority for funds in recent years. It’s crucial that firms have the right tools in place to streamline this function to manage operational risk. With Brexit contributing to the demand for oversight of fund ranges domiciled in the UK and Central Europe the need to demonstrate effective oversight is greater than ever.

 

Paul Roberts is CEO of Milestone Group

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