Now that we find ourselves in a perpetually evolving regulatory post-crisis environment, it’s interesting to consider how the importance of compliance has increased and how firms have responded. Before 2008, many institutions viewed financial compliance as an administrative inconvenience or commercial hindrance as opposed to a means for ensuring operational resilience and investor confidence. Firms that took compliance seriously prior to the crisis did so by employing best-of-breed technology services and have successfully avoided reputational damage. Lost time and costly mistakes have proven that those who insist on internal development (unjustifiably, in my view) have been left in a weak position. But technology is only part of the equation; today investors can take advantage of managed services, which combine advanced functionality with compliance expertise.
In my career as a Compliance Officer, I’ve witnessed an interesting fact frequently ignored, under-utilised or completely untapped; investment managers are subject to the same regulation. This is true of shareholding disclosure. Of course, there will always be nuances in the application of regulation given a firm’s specific portfolio strategy, the financial instruments employed and a firm’s legal structure, but the commonality is still significant. Because of this, compliance professionals frequently find that opportunities for discussion with other firms in the industry are highly valuable. Regulation often (and many times purposefully) lacks the specificity and precision to create rules in practice, which means that much of the ambiguity in regulation must be ironed out before hand.
By coupling the power of flexible, cloud-based software with a team of compliance experts who translate the myriad of changes into rules-based algorithms that are shared and validated by industry peers, investment organisations can cope with the current speed of regulatory change confident that operational decisions are based on an industry standard. The traditional IT solutions for shareholding disclosure and portfolio compliance simply cannot compete and with the advantages of managed services, the time for change has arrived.
To describe the complexity, which underpins the need for a new kind of service organisation, the number of relevant global jurisdictions tops 80! Each country drafts its own regulatory framework in terms of the types of disclosable instruments included, the percentages involved, the forms to be used, and the timing. This all adds significant complexity to say the least. For example, one jurisdiction might be interested in every equity security traded on national exchanges, others in the country of incorporation, and another in a combination of both (and this just scratches the surface).
Some other examples of unclear regulation, which justify the need for a dedicated team to monitor, code and provide a centralised “industry view” on applying financial regulation include:
- Does a derivative being cash settled or physically settled affect whether it is to be considered in shareholding disclosure calculations?
- Exactly which financial instruments are to be included when calculating a disclosable net short selling position?
- Should the calculations include logic to aggregate positions at a portfolio level or at the highest legal entity level?
- How are lent, borrowed, and collateral assets to be included in both AIFMD leverage monitoring and shareholding disclosure calculations when regulation may not be perfectly clear in this regard?
These questions, and many more will need to be answered by most financial institutions, and there is clear benefit associated with knowing how others in the industry interpret and practically comply with the regulation. Of course, organisations can continue to handle this complexity independently in-house, but it would be more expensive given the high cost of bespoke legal advice, and those that do would miss out on the benefits associated with a product used by other leading investment firms.
Whilst working as a compliance professional in a multi-billion dollar asset manager, I recognised this trend and felt compelled to further the disruptive nature of managed services on the finance industry. I did so by joining FundApps. Since then, the benefits of combining continuous software delivery AND a dedicated compliance team are clear to see. Our clients actively engage with us daily to discuss regulatory topics and the compliance engine which sits at the core of our business is refined day-by-day, not only in terms of features and usability, but also in terms of keeping pace with changing regulation.
Predicting no major slowdown in new financial regulation, financial institutions will have to continue to adapt to an environment in which the inclusion of a service-oriented solution which combined leading technology and a strong compliance content will not only be advantageous, but potentially inevitable. Make sure you’re not the odd-one-out.