Fri, May 26, 2017
A A A
Welcome Guest
Free Trial RSS
Get FREE trial access to our award winning publications
Industry Updates

Luxembourg management companies urgently need to review due diligence practices

Thursday, August 18, 2011
Opalesque Industry Update - Laven Legal Services believes that Luxembourg management companies need to review their due diligence practices and has published a white paper on the subject. Under the Ucits legal framework, Luxembourg regulated management companies outsource some important activities for which they remain responsible in the eyes of the law and the CSSF, the report says.

Any accounting or administration activities with one or more banks as well as distribution activities are included, the firm believes. “This clearly results from article 110(1)(f) of the law of 17 December 2010 (previously article 85 of the law of 20 December 2002)”.

Laven says that in order to understand and to be able to monitor the outsourced activities regulated management companies must review the way they do business, not only to be compliant with the law but also to protect themselves from the impact of operational failures.

“This includes the risk of claims for negligence as well as reputational risk.” Directors and conducting persons of regulated companies should remember that legally they have the ultimate responsibility for all delegated activities under article 110(2).

Laven explains that previously, under UCITS III, and before the impact of the 2008 financial crisis, it was common for management companies in Luxembourg to rely on the regulated status or brand recognition of the third parties they worked with. “Companies did not feel the need for in-depth due diligence, notably in terms of covering operational risks. In addition they would rely on the reporting received from the same third parties as evidence of monitoring. This reporting alone, however, falls short of providing the proper checks as was demonstrated during the Madoff fraud. As the industry faces new rules, as well as a tougher regulator and scrutinising investors, this is a good time for regulated companies to plan ahead and review any due diligence process they are using. We will look at the changes that are impacting operations, we will suggest processes for due diligence so that it meets the right standards without imposing too many new administrative costs.”

The firm also points out that the UCITS IV Directive will also be supplemented in many respects by the AIFM Directive which also touches, in a similar way, on other regulated financial companies such as custodians and managers of Special Investments Funds (“SIFs”)

“The rules remain broad and should be of concern for all regulated companies. To date there is little by way of guidance on how operational risk should be managed, although the Association of the Luxembourg Fund Industry (“ALFI”) has summarised the following “best practice measures” to assist in monitoring outsourced functions for management companies. They recommend breaking down the process into three main phases for third party due diligence:

  • The Initial Phase – the stage during which all delegations should be subject to appropriate due diligence prior to the delegation of the activities.
  • Ongoing Monitoring – this stage requires that the board of directors of the management company ensures that an effective ongoing monitoring program is in place for all outsourced functions.
  • The Termination Phase – the stage during which the management company must decide whether to bring the function back in-house, appoint a new delegate, or discontinue the function.
Laven believes that the key to due diligence is the end result, namely the reliable and demonstrable selection and monitoring of third party service providers. To make this workable it takes:
  • a set process which details the items that must be reviewed (including scope and depth) and how it will compare matters identified as against best practice standards; and
  • the investment of time so that the process can be done in full.
“In practice the difficulty lies in setting out a process that will work for third parties that provide different services for which best practice standards may vary. The good news is that there are no particular prescriptive processes and no EU regulator has set in stone what they expect financial institutions to do in detail, only in terms of general practices and ethics. The expectations of the regulator will be high but this principles based approach is likely to be a good thing as it gives regulated companies freedom to determine their own standards and to promote themselves to investors as leaders in the field of operational risk management.” Source

What do you think?

   Use "anonymous" as my name    |   Alert me via email on new comments   |   
Today's Exclusives Today's Other Voices More Exclusives
Previous Opalesque Exclusives                                  
More Other Voices
Previous Other Voices                                               
Access Alternative Market Briefing

 



  • Top Forwarded
  • Top Tracked
  • Top Searched
  1. Investing - Tudor Jones backs AI hedge funds, Massive hedge fund trades highlight insider buying: GE, Pentair, Tempur Sealy, Apollo Global and more, Hedge funds big wigs are buying consumer and selling tech, here's the stocks[more]

    Tudor Jones backs AI hedge funds From FT.com: Hedge fund magnate Paul Tudor Jones has invested in a brace of artificial-intelligence powered "quantitative" hedge funds, underscoring the increasing acceptance that the industry will need to turn more to technology and away from traditional

  2. Soon hedge fund investors won't bet on a man, they will bet on a machine[more]

    From Forexlive.com: The Wall Street Journal is in the midst of a 17-part series that looks at the rise of quant funds. The AUM and money invested in quant funds still trails traditional asset managers but the gap is closing. What's truly amazing is volume. Quant funds make up 27% of trading vo

  3. Investing - China's HNA wants to invest in Value Partners, Risk parity investors reap rewards from rebalancing act, SoftBank's $100 billion tech fund rankles VCs as valuations soar[more]

    China's HNA wants to invest in Value Partners From Reuters.com: HNA Group has alighted on a logical, if pricey, target in Hong Kong. The deal-hungry Chinese travel conglomerate known for overpaying wants to invest in Value Partners, one of Asia's few sizeable independent asset managers,

  4. Opalesque Exclusive: Investors warm to ESG, but seek standardization[more]

    Bailey McCann, Opalesque New York: Asset managers and asset owners plan to double their investment in Environmental, Social and Governance (ESG) driven strategies over the next two years, according to a survey from BNP Paribas Securities Services. The report, "Great Expectations: ESG - what's nex

  5. J.P. Morgan Asset Management launches ultra-short income ETF[more]

    Komfie Manalo, Opalesque Asia: J.P. Morgan Asset Management, the $1.5tln investment management arm of JPMorgan Chase & Co., has launched the JPMorgan Ultra-Short Income ETF (JPST), an actively managed ETF that seeks to provide current incom