This article is sponsored by Sanne Group.
How can third-party service providers best support fund managers with regulatory and compliance matters?
Brijesh Patel: There are many factors to consider, ranging from skill set through to experience and process model. The service environment has come a long way, particularly in the past decade, and the evolution of requirements has pushed service providers to develop solutions that not only enable financial institutions and fund managers to meet regulatory, compliance and tax reporting requirements, but also add value along the way.
Paul Séjournant: Service providers can support fund managers in dealing with the avalanche of regulation that has arrived in the past few years. An important element of addressing that is data – fund administrators collect significant data when providing services to clients and see a wide number of data points that are useful for tax reporting, regulatory reporting and compliance. Service providers facilitate the gathering of information and reporting more efficiently, for example by collecting investors’ self-certifications under the Foreign Account Tax Compliance Act and the Common Reporting Standard.
In addition, because third parties deal with many clients with different profiles that are mostly faced with the same regulatory requirements, they are well-placed to understand market best practice and common challenges.
Another point to consider is that, in several cases, regulatory change also impacts administrators themselves, as well as managers, meaning they will be ideally placed to support managers with those changes. A good example is the US Securities and Exchange Commission’s recent proposals to amend the Investment Advisers Act, where we have done a lot of analysis on what that means for fund vehicles we work with, as well as our own deliverables to clients.
What other cross-border compliance challenges should managers consider?
PS: We continue to see an increasing number of regional and multi-regional structures being established as more pockets of investment opportunities emerge. A fund manager marketing in multiple jurisdictions needs an administrator that has local knowledge to comply with as many frameworks as possible.
That ability to have ears on the ground and have deep regulatory awareness allows an administrator to tell clients what is changing and where, as well as what that means for clients. A manager might be caught by the Alternative Investment Fund Managers Regulations and the Sustainable Finance Disclosure Regulation and Taxonomy regulations in Europe, for example, in addition to complying with local FATCA and CRS reporting requirements, while several investors may require information for US K1 reporting purposes.
On top of that, a fund manager will need to account for an administrator’s adaptability to new or evolving reporting frameworks, as we have seen with the introduction of new beneficial ownership requirements in the UK under the 2022 Economic Crime Act. There is a need to navigate different requirements in terms of legal domicile as well as in terms of what is being reported, which could range from environmental, social and corporate governance data to tax information.
How can fund managers best assess the technical competencies of service providers?
BP: When it comes to technical competencies, there are numerous factors to consider. The first is to try to get an understanding of the service provider’s current portfolio of client types and fund structures. Managers want a provider that has a proven track record and by gaining an understanding of the domiciles they are currently servicing in, this can often help managers become more comfortable with the provider’s active experience in those domiciles which they themselves are either currently operating in or plan to operate in.
Managers should also seek to understand the nuances that the service provider has come across that may drive further local regulatory and compliance reporting requirements, as this will help them better understand the depth of their service expertise in key domiciles.
If, as part of initial exploratory discussions, it becomes apparent that a service provider has mechanisms in place for ongoing regulatory horizon scanning to proactively keep on top of upcoming developments and anticipate the impact of any future regulatory changes, that’s a big tick. If this is lacking, it can often be an area that creates aggravation, particularly where a manager needs to reach out to underlying investors.
Next, managers should try to understand any errors and reporting or filing issues that providers have had. Gaining this insight can help managers determine the credibility of the services on offer. Understanding how data is securely maintained and processed – as well as the general information security framework that the service provider has implemented – is also very important.
How important is the use of technology?
BP: Technology allows for data capture and processing to be performed in an automated or semi-automated way. We would hope that all service providers have some form of software in place to manage that, but where they are relying on offline methods to capture and process data, there is an inherent risk of losing information, inadvertently editing data, or not updating it frequently enough to keep it accurate and current.
PS: A lot of the reports that go to regulators’ platforms are done in a specific language, typically XML. These XML reports are then reliant against a schema, which means the data input is subject to limitations and requirements imposed by that schema. The use of technology therefore has two benefits: transforming data inputs into XML reports and ensuring the data complies with the XML schemas. An administrator that uses technology efficiently will see significantly less technical errors when performing reporting submissions.
What are administrators doing to attract and retain the best talent?
PS: The landscape of regulation and technology has changed so much over the last decade that the reliance on traditional administration and accountancy skills has eroded. While those skills are still the backbone of the industry, we are now looking for people with more regulatory awareness and more understanding of regulatory reporting languages and schemas.
On the technology side, it is also crucial to have people that can manipulate and understand data as well as, and more importantly, how to address filing or technical errors rapidly. To attract and retain those talents, administrators are proactively providing positive value-adding reskilling opportunities for diversified talents within markets.
BP: Ultimately, service providers must have a deep understanding of upcoming regulatory change and how it may impact clients and their structures. They need to be to be able to absorb, digest and translate regulatory changes in a concise manner to help managers better understand what, if anything, has to be done differently going forward. Continuous regulatory change has pushed corporate services providers and fund administrators to strengthen training frameworks in place. What may have once been seen as a niche requirement has now become market standard and the ability for service providers to widen their knowledge base as much as possible will continue to be key in the coming years.
PS: There is no hiding from regulatory change, so the more we can elevate our staff skill set, the more broadly we will be able to adapt to that change. That has to be part of the DNA of our firm.
BP: The tightening of current rules, new proposed rules and the continued scrutiny of financial institutions and fund managers conducting business activity across the globe – whether to raise or deploy capital – is resulting in the need for those accountable to stay on top of evolving reporting requirements.
While it has almost become tradition to outsource regulatory, compliance and tax support services to third-party service providers, it continues to be critical that the chosen service provider has the right skill set, competence and streamlined operating model in place to ensure all the entities it is supporting remain in good standing.
What should a manager consider when appointing a third-party administrator to deal with regulatory reporting?
PS: There are five key points to consider.
1 The first is data, where the ability of a fund administrator to collect varied data and recycle it for the purposes of reporting is critical. A manager should be able to rely on their administrator to collect all the data points necessary to report at investor, investment and entity level, and to tag data fields in a way that will allow for reporting to be carried out faster and at lower cost.
2 The second is awareness of regulatory changes in various domiciles. A fund administrator needs to keep track of new or amended regulations and how those impact their clients. This will result in an administrator being less of an outsourcing provider and more of a partner, providing proactive updates to help managers understand and address new requirements.
3 Next is process. Administrators will have to ensure there is accountability and ownership of what is being outsourced, as well as procedures to deal with all the requirements. An administrator must be able to demonstrate they have processes in place that make it possible for clients to clearly understand what is coming up and what they need to do.
4 The fourth key consideration is cost. Service providers that are well-established geographically, experienced in regulatory compliance and able to use technology efficiently will be able to reflect their scalability through their clients’ fees.
5 Finally, a manager should look for versatility from an administrator. Where managers have international structures and a wide range of reporting requirements, their administrators should be proficient in dealing with multiple regulatory frameworks.