How did you get into the financial services industry?
I have been working in the financial services industry for more than 15 years now. I started more on the investment banking side and moved into the investment management sector around seven years ago when I relocated to Sydney and took on the role of running the business systems for a multi-manager organisation there.
I am currently the product manager for Milestone Group, both for the Europe, Middle East and Africa region, and also for our pControl Funds Processing suite of products, which include NAV control, pricing and cash allocation. I moved back to London 18 months ago and have been working on developing our product range to meet specific European requirements.
What are your views on outsourcing arrangements in the fund management industry?
Milestone Group is not involved in consulting with asset managers on the process of making outsourcing decisions and determining their most appropriate business models. Rather, we are focused on providing asset managers with the tools that they need to oversee any outsourced relationship that they may have with external third-party administrators (TPAs), with a specific focus on the quality of NAVs that are being produced by a TPA.
From that oversight perspective and with regard to how outsourced relationships have changed over the last five years, we have seen an increased regulatory focus on ‘substance’, where substance refers to asset managers having resources and processes in place to provide appropriate oversight of their outsourced administration activities.
The CSSF (Commission de Surveillance du Secteur Financier) in Luxembourg, the Bank of Ireland, the prudential regulation authority in Australia, the monetary authority in Singapore, the SEC in the US; we see many of the global regulators starting to focus a lot more on ensuring that asset managers are upholding their fiduciary responsibilities by making sure they have appropriate capacity, resources and skills to oversee the quality of the servicing being produced by their partners.
This is especially true in Luxembourg where the CSSF places greater emphasis on management company substance and the role and responsibilities of the conducting officers. The upcoming introduction of the Alternative Investment Fund Managers Directive (AIFMD) in Europe will only increase this focus as substance requirements are placed on alternative, non-UCITS funds.
How can asset managers, owners or administrators maintain effective oversight?
Our focus is on working with asset managers to provide solutions that allow them to have an efficient oversight function of their outsourced fund administration services. This means automating the processes of data collection from those service providers, providing a framework in which a number of controls and checks can be run to ensure the quality of the data and results being delivered and also to provide reporting that supports monitoring the quality of the service being provided.
AIFMD will also impose oversight requirements on depositories, so we are starting to talk to the depository banks about their oversight requirements too.
Effective oversight is ideally achieved through an administrator working together with their clients to provide access to the appropriate level of data to support independent controls being executed, and also giving their clients a degree of insight into their own processes so that a client can oversee that their administrators’ processes are appropriate.
How has the quality of NAV control changed?
Our experience is that the quality of the NAVs being produced by administrators has almost certainly improved over recent years as administrators have increased their investment in technology to support automated NAV production, and their clients have introduced more sophisticated levels of oversight in response to increased regulatory pressure.
In Luxembourg, the CSSF publishes an annual report where they provide details of the number of NAV errors that have been reported to them by the management companies across the year and the levels of compensation that is paid out. The number of errors has been dropping slowly over the last few years, as has the levels of compensation that have been paid out, even as fund numbers have been growing.
So that trend is positive and we would suggest that it is due to a combination of improved technology and improved processes on the administration side, combined with a more vigorous level of oversight on the asset manager side.
Do your strategies change in terms of geography?
The overarching message is the same globally; asset managers cannot outsource their fiduciary responsibilities and they therefore have to maintain appropriate levels of oversight to ensure that their funds are being administered appropriately.
We do see differences between markets in oversight practices and regulatory requirements do influence this. For example, the US is a lot more mature in outsourcing relationships having started the outsourcing journey earlier and the Dodd-Frank Act effectively forcing asset managers to outsource their administration now.
And we have already touched on the regulatory requirements of the CSSF in Luxembourg being a lot more specific about substance and oversight requirements than, for example, the Financial Services Authority regulations in the UK. This changes the business case for oversight from the asset manager’s perspective.
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