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The fund industry is currently subject to a myriad of regulations, including Ucits, Mifid and AIFMD amongst others, which pose significant challenges for compliance.
The European Commission could be seeking to add to the regulatory regime with a new proposal to review the prudential treatment of investment firms, aimed at improving investors’ access to new opportunities and introducing better ways of managing risks. Early next year, as a follow-up to the work of the high-level expert group on sustainable finance, the European Commission is also due to present measures on improving disclosure and better integrating environmental, social and governance (ESG) considerations into the investment mandates of asset managers and institutional investors.
As the wheels of the regulatory machine continue in perpetual motion, how should funds respond to such developments to ensure their compliance, in order to avoid costly fines and reputational damage? Furthermore, is there a way that funds can future-proof their compliance activities in an efficient and cost-effective manner, which avoids funds having to pass on the additional compliance costs in higher fees and charges?
Funds may find the right answer with fintech, or its subset regtech, solutions.
Justin Partington Group fund solutions leader (SGG)
The good news is that funds may find the right answer with fintech, or its subset regtech, solutions to ease the compliance burden. Regtech describes a set of companies and solutions that address regulatory challenges in financial services and other industries through innovative technology. The UK has been ahead of the curve in pioneering the Regulatory Sandbox Licence, and closer to home the Luxembourg House of Financial Technology that was launched in April this year, which will set up a developer sandbox initiative to allow innovators to test their ideas, with fund technology being a key area of focus. Other Luxembourg-based companies such as KYC3.com, which seeks to manage the client on-boarding process, and Governance.io, which provides a platform for funds to deal with complex data and regulatory oversight duties. At SGG Group, we have deployed new regtech tools for regulatory compliance and reporting, and see increasing client demand for more self-service data in dashboards, and customised investor reporting.
Client demands have also seen the rise of new fintech firms such as Clarus Risk who developed the RiskMonitor® solution to help clients meet the challenges resultant from growing regulatory risk reporting demands. In general, there are three distinct activities that regtech can offer efficiencies:
organising the data required for reporting;
analysing risk data;
generating risk reports.
Fund risk analysis
Fund trade/P&L analysis
A risk function can serve as an independent and secure warehouse of positions and risk exposures. Technology also enables the flexibility to measure risk in a manner appropriate for the investment strategy and the underlying asset classes.
Max Hilton of Clarus Risk comments, “Increasingly, risk reporting must address the needs of multiple audiences including internal governance, compliance, and regulators through filings such as AIFMD Annex IV. Fintech can provide flexible reporting to help asset managers address these different requirements and to leverage risk data and risk calculations rather than require duplication of work.”
Blockchain, or distributed ledger solutions, could also have strong potential for the future.
Justin Partington Group fund solutions leader (SGG)
It is estimated that there are already over 100 regtech companies in Europe, and EU will be aiming to boost the entire fintech sector by undertaking an assessment of the case of an EU licencing and passporting framework for fintech activities by the end of this year, which would provide funds with even greater choice of compliance solutions. The UK is the most known EU domicile for fintech or regtech companies and Luxembourg and Amsterdam have emerged as a good alternative thanks to the strong regulatory framework and incentives put in place.
Blockchain, or distributed ledger solutions, could also have strong potential for the future. Fundsquare, set up by the Luxembourg Stock Exchange, is part of the FundsDLT distribution platform, which in July this year announced that it had run the first real blockchain transactions in the history of investment funds, however it remains to be seen if this could be transformative for fund compliance. Earlier this year, IBM built a security-rich blockchain to manage the administration of a private equity fund managed by Unigestion.
Blockchain could have further potential in the areas of custodian services and customer due diligence.
Overall, at SGG Group, we are seeing fund compliance moving into a new phase, with fintech and regtech solutions already becoming an industry norm. Regtech will further enable fund service providers to better serve our clients with a future-proofed form of regulatory compliance that will lead to more efficiency, increased growth and better returns on their investments.