Which delegation oversight regulations do Management Companies based in Luxembourg need to comply with?
CSSF Circular 18/698 is the basis of duties that Management Companies must follow to be compliant. The circular focuses on 3 key principles of the oversight process: Delegates, Risk-Based Approach and Due Diligence.
1. Delegate selection and replacement process – The procedure carried out by the IFM in the selection and change of a delegate.
2. Risk-based approach – The approach to assess the risk arising from each delegate and its impact on the IFM activities.
3. Due diligence process - After defining the ongoing monitoring, a Due Diligence process must be implemented. First, an initial Due Diligence framework will define the level of monitoring on a specific delegate; then, a continuous Due Diligence framework will ensure a continuous set of controls of the delegated activities.
Regulatory Framework Reply Luxembourg
In addition, the various AML regulations apply to the activity of fund distributors, and as such, must also be complied with.
What do you recommend to achieve an efficient delegation oversight framework?
The first measure is to put in place a clear and robust oversight governance, with subject matter experts who will take the responsibility of all oversight activities: policies & procedures, contracts/SLA, KPIs collection and monitoring, escalation, exceptions handling, initial and ongoing due diligence, reports production and dissemination, and anticipation of regulatory evolutions.
Secondly, putting in place and maintaining appropriate delegation oversight IT tools will facilitate the collection and treatment of performance indicators produced by delegates. Such tools can be specific to delegation purposes (SaaS, PaaS, on premisses) or tailor-made to each Management Company’s volumes and IT environment.
Finally, it is important to share with Senior Management the output of the delegation oversight activities. Most delegated activities are as important as non-delegated activities. They require the same understanding and attention from Senior Management.
How can Management Companies implement a pragmatic distributors oversight?
To achieve efficiency in the distributors oversight activities, Management Companies must implement an entire framework, based on cross-departmental cooperation on governance, workflows, policies & procedures, controls, data/documents management and reporting:
1. Distribution Oversight Governance - Assign pooled resources who support the periodic tracking of distributors activities through a RACI matrix.
2. Distributors Lifecycle Workflow - Build a centralized model of distributors oversight, starting from the initial Due Diligence and onboarding to the monitoring and reporting of distribution activities.
3. Due Diligence Procedures - Implement an end-to-end Due Diligence procedure (initial + ongoing) according to the risk-based approach.
4. Efficient Communication Processes - Establish a structure of communication between teams with appropriate systems per processes (onboarding, name changes, mergers, terminations).
5. Ongoing Controls - Capture and analyse insightful figures (AuM fluctuation, KYD statuses) collected from distributors activities to track and constantly optimize the oversight.
6. Data Quality - Extract, control, transform and track all data required for the oversight activities.
7. Documents Management - Store and categorise documents (DA’s, SLA’s, etc). Build a process to manage all documentation across relevant service lines (operations, Legal, Compliance, CRM).
8. Oversight Reporting – Report distributors oversight outcomes appropriately and efficiently to Senior Management and other relevant departments.
These principles should be applied in the Distributors Due Diligence framework, effectively communicated to the employees involved in oversight processes and updated every time a regulation change is taking place.
Having an efficient distributors oversight framework will not only help reach compliance with delegation regulations. It will also provide the Management Company an accurate view on the distributors scope and performance.
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