Future-proofing fund compliance

Future-proofing fund compliance

The funds industry is currently subject to a myriad of regulations – UCITS, MiFID and AIFMD among 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 risk. 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 and 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 that averts having to raise fees to cover additional compliance costs?

The good news is that funds may find the key to easing the compliance burden with FinTech, or its subset RegTech. The term ‘RegTech’ refers to 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 April this year saw the launch of the Luxembourg House of Financial Technology. This 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 harnessing RegTech include, which seeks to manage the client on-boarding process, and, which provides a platform for funds to deal with complex data and regulatory oversight duties. At IQ-EQ, we have deployed new RegTech tools for regulatory compliance and reporting, and are see increasing client demand for more self-service data in dashboards, as well as customised investor reporting.

Client demands have also led to the rise of new FinTech firms such as Clarus Risk, who developed the RiskMonitor® solution to help clients meet the challenges resulting from the growing regulatory risk reporting demands. In general, there are three distinct activities where RegTech can offer efficiencies:

  1. Organising the data required for reporting
  2. Analysing risk data
  3. Generating risk reports

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 commented: “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.”

It is estimated that there are already over 100 RegTech companies in Europe, and before the end of this year the EU will be assessing the case for an EU licencing and passporting framework for FinTech activities, which would provide funds with even greater choice in compliance solutions and boost the entire FinTech sector. The UK is currently the best-known EU domicile for FinTech and RegTech companies, while Luxembourg and Amsterdam have emerged as good alternatives 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 announced that it had run the first real blockchain transactions in the history of investment funds. It remains to be seen, however, 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 also have further potential in the areas of custodian services and customer due diligence.

Overall, at IQ-EQ, we are seeing fund compliance moving into a new phase, with FinTech and RegTech solutions already becoming an industry norm. RegTech, in particular, will enable fund administration firms such as ours to better serve our clients with a future-proofed form of regulatory compliance that will lead to greater efficiency, increased growth and better ROI.