Outsourcing compliance and risk management for asset managers

Outsourcing compliance and risk management for asset managers

KAG, KKV-FINMA, AIFMD, Money Laundering Act, VSB16, FINFRAG, FIDLEG, FINIG – these are all codes and bywords that have recently preoccupied the Swiss finance sector and are likely to go on doing so for some time. But what exactly do they all mean and how do they affect each financial institution? These are questions that many small and medium-sized asset managers are now pondering. One thing is for sure: regulatory intensity is likely to rise, not fall. The situation is also becoming more complex in that FINMA expects a properly organised company to employ appropriate and suitably qualified personnel before obtaining authorisation. But many small and medium-sized asset managers do not have the financial or human resources to give these complex matters their due. Up until now it has usually been asset managers who are subject to FINMA that have been affected by stricter regulations; but now, with the advent of FINIG (and with it FIDLEG), compliance and risk management requirements that need to be met by the managers of private assets (external asset managers) are set to rise. There is therefore a clear trend towards the professionalization of compliance and risk management.

Because of the business volume of many small and medium-sized asset managers, this can create a bottleneck of resources which has to be remedied within certain cost and income scenarios. Regulators are now insisting on adequate separation between asset management and sales on the one hand, and compliance and risk management on the other – and this means separate personnel, which makes staffing an issue. Because of the aforementioned complexity of the subject matter, and the effects it has on an asset manager’s business activities, specialised expertise is often required in various areas. Ideally this will encompass a combination of law and economics with an in-depth understanding of the asset management business and the Swiss regulatory environment. For a company running a proven business model with a stable client structure, a compliance officer will only be needed part-time and the workload of this individual will fluctuate throughout the year. This makes it even more difficult to find a suitable person to fill the post. Many companies employ full-time Compliance Officers, which means higher wage costs and finding other work for them to do, and this can lead to dissatisfaction. The work involved in risk management, however, is evenly spread throughout the year but does not usually entail full-time occupation, and again this can entail a problem of capacity.

But it is the competence of candidates rather than workload or cost which is usually the deciding factor in recruitment. Expertise in money laundering laws, cross-border, sales, asset and investment processes and legal foundations is essential in Compliance. As well as covering and assuring these technical skill-sets, Compliance assists Management in sustaining an appropriate internal instruction procedure, complying with agreements that have been concluded, fulfilling reporting duties and training staff. Risk Management requires an understanding of the business activity as a whole, as well as knowledge of inherent risks, risk measurement, risk reduction, the production and implementation of a functioning internal monitoring system and knowledge of how asset and investment processes work (including the associated key controls). A Compliance Officer and Risk Manager both have to possess a risk-minimising, precision working style and a certain amount of authority. These two job profiles are merely rough sketches but they do show just how diverse the necessary qualifications are.

In light of all this it is unsurprising that many asset managers have already decided to make use of the option contained in Article 66 of KKV-FINMA, which came into force on 1 January 2015. This Article, in conjunction with the corresponding articles of KAG and KKV, permits the outsourcing of work in the interests of proper management. Outsourcing compliance and risk management work can make good sense when the costs and benefits are analysed. Choosing the right professional outsourcing partner gives companies a similar level of flexibility to an in-house solution. It is also very easy to use modern IT to smoothly integrate compliance and risk management into internal processes, and this enables the positive aspects – such as availability, cost savings, diversity of available expertise, representation and access to a resource pool – to be enjoyed to the full. That is why employing an external specialist or outsourcing compliance and risk management can be a valuable and appropriate option. On the technical side, outsourcing can offer other benefits because it gives access to the outsourcing partner’s network of specialists (such as labour lawyers) and to regulatory authorities and auditors. Last but not least, using a modern IT platform for outsourcing can potentially increase efficiency and quality. The result is genuine added value for clients, and with it a lasting competitive advantage.

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