Almost all (99 per cent) senior leaders and senior compliance and risk executives surveyed at alternative fund manager firms which collectively manage around USD132.25 billion AUM, say the board and senior management at their firm already take governance seriously – with 54 per cent saying they take it very seriously. Almost all (93 per cent) say the board and senior management already have the required blend of skills to conduct its duties correctly and have effective roles in place to manage and mitigate governance risks.

However, the international study by Bovill Newgate and Ocorian, reveals that despite this more than two thirds (65 per cent) have been subject to governance related fines or sanctions in the last two years. A further 12 per cent have received an information request or visit from the regulator in the last two years.

While 70 per cent say their organisation has already increased its focus on governance during the past two years, a number of contributing factors including the numbers of governance related fines and sanctions has led to more than nine in 10 (90 per cent) saying that they see the focus their organisation places on governance increasing over the next 24 months. Of these, almost a third (30 per cent) say this will increase dramatically.

There are many ways in which this increase in focus can be achieved but of those surveyed, almost all (96 per cent) say it’s important for their organisation to use an independent specialist risk and compliance company. Over half (55 per cent) say it’s very important and only 4 per cent say it’s not important.

Paul Ford, Head of Regulatory and Governance, at Bovill Newgate, says: “The alternative fund managers we surveyed have always taken governance extremely seriously, but the regulatory landscape is constantly changing and becoming even more complex, particularly for the global firms.

“For almost all firms, the survey demonstrated the importance to use an independent specialist risk and compliance company. An independent company not only brings specialist skills and experience that is very difficult and time consuming to recruit to in-house, but also technology, software and processes to manage complex frameworks and structures.”

 “As alternative fund managers and other clients look to increase their focus on governance, we recommend following a three lines of defence approach to protect their businesses – firstly, implement robust procedures, policies and training; secondly, comprehensively monitor these; and finally, review and challenge through independent audit.”

Ocorian lists its three lines of defence approach to tackle risk and compliance challenges:

·                 Line one: create clear and robust frontline processes and procedures, supplementing this with both online and face to face training programmes for staff.

·                 Line two: build and empower a comprehensive compliance oversight function which monitors and assesses the processes and procedures, as well as advising and supporting staff and senior managers to comply with the firm’s obligations.

·                 Line three: seek review and challenge of the firms AML framework via annual independent audits.

The international study among senior leaders and senior compliance and risk executives at alternative fund manager firms which collectively manage around USD132.25 billion AUM, found that of those who already use AI as part of its risk and compliance procedures one in 10 (11 per cent) started doing so more than two years ago. Over half (55 per cent) started two years ago, and 24 per cent started between one and two years ago. 

Ocorian’s global study reveals that out of those who don’t already, 71 per cent say that they intend to start using AI within its risk and compliance functions within the next six months. 

There are a number of areas in which alternative fund managers think AI can be used to enhance risk and compliance procedures. The top area given was in transaction monitoring (28 per cent), followed by staff filings (21 per cent) and internal capital and liquidity monitoring (20 per cent). AI can also be used to monitor communications (19 per cent) and financial promotions (13 per cent).

Joe French, Managing Director and Head of Financial Crime at Ocorian, says: “AI is revolutionising almost every aspect of financial services, and our survey results show that the majority of alternative fund managers have already been using AI within their compliance and risk procedures for around two years. When used for the right type of tasks, AI can transform the ability of over-stretched, under-resourced compliance teams. 

“AI promises to create transformational changes in our industry but human input is going remain critical – take algorithmic trading; the FCA require humans to intervene in machine processes for vital checks and to stop runaway errors potentially taking down global markets. 

“The potential dangers are industry shattering. And thinking of the risks, just as the industry incorporates the new technology, so do criminals. Bad actors are using technology including AI to target consumers and firms. In recent years they have been able to circumvent banking controls by using sophisticated social engineering techniques to trick victims, making detection much more challenging. 

“Firms must ensure that systems and controls keep up with the increasing sophistication of criminal groups and should use the advances in technologies to help prevent financial crime. They have to calibrate their use of technology to individual requirements to be as effective as possible and keep fine tuning their response to combat the rapidly evolving threat.”

Hilton Goudriaan, Head of Systems, Regulatory & Compliance at Ocorian, says: “AI tools can process and analyse large datasets, which can assist with aiding alternative fund managers in meeting reporting standards, analysing market trends, portfolio risks, and identifying potential compliance issues. AI can be developed to streamline due diligence processes. Automation tools, such as our comprehensive compliance solution, the Gateway, go the extra mile and support teams with fully inclusive diarised risk-based compliance monitoring programmes, online training, manuals, and guides. It’s clear to us that early adopters and first movers in this space will keep the edge when it comes to regulatory developments and evolving global risks.”

The merger of Waystone’s and KBA’s management companies in Ireland combines KBA’s UCITS expertise with Waystone’s pre-eminence in alternatives, creating a management company with AUM of EUR175 billion, the firm writes.

The addition of 100 KBA consultants in Ireland, London and Luxembourg allows Waystone to offer expert advice and an extensive suite of services to clients worldwide, the firm adds.

Concurrent with the corporate merger, an enhanced governance structure has been implemented along with a consistent operating model across locations, enabling the businesses to deliver a single global solution.

The completion of this corporate merger comes as Waystone nears the finalisation of its acquisition of Link Fund Solutions. These acquisitions represent significant milestones in the company’s history as it continues to strengthen its market position.

Rachel Wheeler, CEO of Global Management Company Solutions at Waystone, says: “The integration programme team have worked incredibly hard over the last six months to ensure a true and seamless integration of KBA into the Waystone Group. The integration has facilitated the implementation of a new and simplified operating model meaning we are now even better equipped to provide comprehensive and innovative solutions to our clients as they continue to navigate an increasingly complex regulatory landscape.”

Andrew Kehoe, CEO of Waystone Management Company (IE) Limited, says: “Having now truly integrated our highly successful and complementary organisations, we look forward to delivering substantial benefits to our clients. By combining the expertise and depth of experience of both organisations, we’ve expanded our suite of services to create an unrivalled ManCo offering.”

Eight out of 10 (82 per cent) senior legal, compliance and marketing professionals across the asset management and investment sector in the UK, US and Australia admit that they see their relationship with each other as adversarial and ‘us and them’.

In fact, marketers in the sector see the compliance approval process as their biggest challenge (42 per cent agree), even more than reaching the right audience with their content.

Within the compliance review process the relationship with the legal/compliance team is seen as the second biggest challenge (chosen by 29 per cent), just behind concern over the lack of rules for new(er) marketing channels like social media (30 per cent).

Three-quarters of marketers (76 per cent) even think legal and/or compliance is in the way of them getting their job done, with 77 per cent believing the review process is too long, with too many steps.

The study surveyed 330 senior legal, compliance and marketing specialists across the UK, US and Australia, working in asset/fund management organisations with 5,000+ employees.

It also found that compliance and legal professionals in asset management are equally unimpressed with their colleagues in marketing: eight out of 10 (80 per cent) think marketing doesn’t understand why they have to abide by complex compliance rules, while even more (88 per cent) think marketing just wants someone else to take the blame when their content is challenged externally.

Nine out of 10 (88 per cent) have often heard their marketing colleagues say that the compliance rules are ‘over the top’, and the same number (88 per cent) say it would be much easier to get reviews done if they did not have to check the basics repeatedly.

Mark Wood, COO at Red Marker comments: “The tension between marketing and legal/compliance in this sector illustrates that the delicate balance between creativity and compliance can easily become adversarial.

“Providing a successful wealth management service – and standing out from competitors – relies on swift, effective and compliant marketing. These teams need to find better ways of working together to ensure content is produced and approved efficiently – but also in a way that reduces risk.

“The marketing compliance process has traditionally been under-analysed and there has been a lack of optimisation, with a certain ‘we have a process’ complacency. Many organisations have built quick-fix solutions or outsourced this process, but new technology means there’s no longer an excuse for inefficiency and apathy.

“With organisations identified as having misled customers receiving publicised penalties, there’s nothing more important than ensuring the marketing compliance process is watertight. That starts at the most basic level with robust communication and openness between teams.”

Eight out of 10 of those surveyed (80 per cent) agreed that the ideal review process would have the minimum amount of human subjectivity, which is where technology can play an increased role.

One such area is artificial intelligence (AI). Marketing, legal and compliance specialists (95 per cent agree) think that an AI-based tool that can intelligently scan and highlight marketing content for compliance and brand risks would support a more effective review process within their organisation.

The main benefits that asset management teams would most like to see from AI is automated checking of standard content like disclaimers, sources and T&Cs (35 per cent agree).

Their main concerns (31 per cent agree for both) are how to ensure an AI tool is set up correctly – and identifying what happens and who would be accountable if the tool missed a risk.

In addition, 82 per cent of those surveyed agree that productive conversations about how to make things happen are needed.

Wood adds: “One of the key barriers between these teams is the stereotypes: marketers seeing legal and compliance as being deliberately hindering, versus legal/compliance teams seeing marketers as too ‘gung-ho’.

“Auditors would expect to see a three line of defence (3LoD) model in place for day-to-day risk management, including management of compliance risk, but how cohesive is the 3LoD model with all this conflict?

“Giving marketing teams the training and tools to consider compliance issues early and often could pave the way towards a more symbiotic partnership.

“However, cooperation is paramount and both sides agree that they need to work together more efficiently to improve the business and help it meet its overall goals. That means having constructive conversations – and it could also mean using AI-driven technology to enhance processes by focusing on automation and standardisation.”

The WFE Green Equity Principles are based on five pillars:

The amount of a company’s revenues/ investments that must be derived from ‘green’ activities.  

Use of a specified taxonomy.

Governance (i.e. existing listing requirements). 

Annual assessment by approved reviewers.

Disclosure around the processes and reviews related to the green classification.

The Guidance Note sets out practical considerations for exchanges who wish to establish offerings that align to the WFE Green Equity Classification and covers the principles themselves, as well as operational matters such as:

Designation of responsibility within the exchange for overseeing the classification

Establishing relevant processes including criteria for revoking classification

Development of the classification mark and provision of public information

Criteria for assessing the appropriateness of reviewers. 

Nandini Sukumar, Chief Executive Officer of the WFE says: “The WFE Green Equity Principles are a significant milestone achieved by the global exchange industry. The Guidance Note, published today, equips aspiring exchanges with the tools to play their part in increasing transparency in sustainable finance and countering greenwashing risks as we move towards a more sustainable global economy”.

Disclosure regulations, like the EU’s Sustainable Finance Disclosure Regulation (SFDR), have had a positive impact in improving transparency in investment fund disclosures, according to the paper, entitled ‘An Exploration of Greenwashing Risks in Investment Fund Disclosures: An Investor Perspective’.

The report finds that regulation such as SFDR has helped to reduce the amount of potentially confusing information about investment funds’ environmental, social, and governance (ESG) factors.

SFDR requires asset managers in the EU to disclose a fund’s environmental and social objectives, characteristics, methodologies, data sources, engagement policy, and due diligence/limitations to the data. This promotes transparency, as this level of detail gives retail investors greater insight into how funds are managed, and how asset managers consider ESG in the investment process.

Whilst the paper concludes that these requirements have likely helped mitigate potentially confusing information, the complexity of the SFDR and EU Taxonomy regulatory landscape risks funds setting more ambitious sustainable investment objectives.

The report also finds that, like SFDR, the Canadian Securities Administrators (CSA) Staff Notice, which explains how existing securities regulatory requirements apply to ESG-related investment fund disclosures, may have also helped to reduce the risk of greenwashing. By way of contrast, the US has yet to implement any comparable regulation.

Chris Fidler, Head of Global Industry Standards, at CFA Institute and contributor to the report says: “Accurate, transparent disclosures are vital to market integrity and the health of the asset management industry, as they provide retail investors with a clear picture of how ESG factors are incorporated into the investment process. While our research suggests that SFDR in the EU and the CSA Staff Notice in Canada have led to more accurate disclosures, challenges remain in ensuring that investors have the information they need to make informed decisions.

“Comprehensive regulation coupled with proactive, positive action from asset managers – such as adhering to independent, global industry standards – can help to improve the quality of information provided to investors and ultimately mitigate the risk of greenwashing.”

The paper analysed product disclosures for 60 investment funds that are marketed to retail investors and incorporate ESG factors in the investment process. The sample includes 30 funds from the EU and 30 funds from the US and Canada.

Of the funds analysed, there were five cases in which a specific inconsistency, exaggeration, omission, or unsubstantiated claim in a fund’s product disclosures might confuse an investor, giving rise to the risk of a perception of greenwashing, or a problematic disclosure.

Inconsistencies – discrepancies in the presentation of funds’ screening criteria – were the most common problematic disclosure, whilst cases of an exaggerated claim and of an omission/unsubstantiated claim – where a fund did not disclose a meaningful piece of information or made a claim that could not be supported by the appropriate evidence – also featured.

Recommendations for investors, asset managers and regulators

To encourage effective and comprehensive fund disclosure practices and help retail investors better assess a funds’ ESG factors, CFA Institute has outlined a series of recommendations, including:

·       Investors should not rely solely on fund’s marketing materials and should closely examine the fund’s offering documents, as well as any sustainability reports. For funds that have a positive change or real-world impact objective alongside a financial objective, investors should review the fund’s impact report or other methodology reports for disclosures on how the fund’s impact is measured, monitored, and reported.

·       Asset managers should strive for full disclosure and fair representation of the fund’s sustainability claims or objectives. The use of plain language rather than ESG terminology or jargon should be the standard; however, if ESG terminology is used, the terms should be defined including, where relevant, how they are calculated.

·       Regulators should work to harmonise terms and definitions so that there is a common understanding of these issues across jurisdictions. Further clarification and guidance will help asset managers as they create and promote their sustainable funds. 

The solution combines CloudMargin’s technology with Margin Tonic’s regulatory consultancy services.
 
The joint subscription service automates the AANA calculation for clients on the CloudMargin platform, leveraging Margin Tonic’s expertise in the multi-jurisdictional Uncleared Margin Rules and helping clients to fine-tune fit-for-purpose trading and compliance strategies.
 
Firms brought into scope for Phase 5 of UMR – based on their AANA calculations for March, April and May of 2021 – were required to begin exchanging Initial Margin (IM) from 1 September for trading of non-cleared over-the-counter (OTC) derivatives. A much larger group of mainly buy-side firms, estimated at almost 800 firms by the International Swaps and Derivatives Association (ISDA), is expected to fall into scope for Phase 6, which takes effect on 1 September 2022. This follows AANA calculations conducted in March through May of the same year for most jurisdictions.
 
Importantly, even for those firms under the threshold (USD8 billion in the US or EUR8 billion in the European Union) and not in scope for Phase 6, there is a regulatory need to perform ongoing year-on-year AANA calculations to assess if firms will come into scope any year after September 2022. 
 
AANA calculation rules can be complex, with product scope and calculation methods varying by jurisdiction. Firms also often encounter AANA challenges such as consolidation of data from multiple trade sources, lack of AANA regulatory guidance and unclear treatment of funds, including multi-manager funds.
 
In addition, trading volumes and products will also change over time, meaning that AANA calculations should be performed regularly and on an ongoing basis. A proactive monitoring approach ensures firms will have full readiness in place, with no late surprises on their AANA results and rushed compliance solutions.
 
Over recent years, both CloudMargin and Margin Tonic have been central to helping a wide range of firms navigate UMR successfully, including a large number of Phase 5 firms. The joint AANA service further strengthens the two companies’ ongoing collaboration on multiple fronts, including an Initial Margin ‘Health Check’ service and other initiatives.
 
Simon Millington, CloudMargin, says: “Calculating AANA is the first step toward determining if an institution is in scope for UMR. Many firms don’t realise that they’ll need to maintain these AANA calculations on an ongoing basis, whether or not they fall into scope for Phase 6. This service offers clients a heightened level of confidence and comfort that they have industry-leading expertise analysing the various nuances of regulatory jurisdictions and complex factors, combined with a robust technology solution providing accurate AANA calculations they can track over time with automated reporting. They can also choose to work with us to automate and optimise their entire collateral workflow as desired, if and when they exceed the threshold. We’re delighted to extend our partnership with Margin Tonic with this important initiative.”
 
Chris Watts, Co-Founder of Margin Tonic, says: “We have performed and advised on AANA calculations across multiple UMR phases, for a variety of different firms and set-ups. Having early and ongoing clarity on AANA status ensures that firms can prepare for compliance with confidence, for the heavy front-to-back changes. Too often, we have seen firms perform AANA calculations too late, or not regularly enough, causing a rush to compliance with unfit solutions and high compliance risk, with the potential to impact their ability to trade. By introducing the joint AANA service with our partners at CloudMargin, we provide an AANA one-stop-shop, combining our industry-leading advice with their best-in-class technology. In turn, we will remove AANA burden for our clients, allowing them to focus on key decisions, either for compliance readiness or for trading adjustments to remain out of scope entirely.”

In preparation for its listing on the London Stock Exchange, PensionBee first engaged Clasematch in late 2020. It needed to review and prepare a multitude of documents, and having all of its compliance documentation on a single platform helped to automate several processes. 

PensionBee started by using the Clausematch editor which provided a centralised view on all the policies, procedures, standards and controls. It enables the team to collaborate on documents in real-time and track any edits that are made, providing a full audit trail of changes. Staff members can also interact with the policy owners via a designated Q&A function, should they have any questions. The system allows PensionBee to efficiently review and prepare all of its documentation, reducing the amount of time the compliance team spends on low-value administrative compliance tasks, and increasing the team’s overall efficiency.

PensionBee recently on-boarded another product module – the Clausematch Policy Portal – which gives staff members access to the most up-to-date company policies. Every member of the 170-strong team is able to access the platform, which gives users the option to confirm that they have read any new policies and that they will adhere to them. They can search the library of policies, mark their most-viewed documents as favourites, and receive email notifications every time a new policy is released. 

Romi Savova, CEO of PensionBee, says: “PensionBee is committed to transparency and high standards of corporate governance, and compliance automation is an important part of this. Clausematch has helped us organise our company policies in one place to make it as simple as possible for staff to find the information they need while providing a comprehensive audit trail. Streamlining our policy management has removed the need for manual reminders and repetitive admin tasks, freeing up the team to spend more time doing what they do best – helping our customers look forward to a happy retirement.” 

Evgeny LIkhoded, CEO and Founder of Clausematch, says: “We’re delighted to be working with such an innovative business as PensionBee empowering the team with our tools for compliance management. Our companies share a lot in common: PensionBee allows savers to combine their pension pots all in one place, while Clausematch allows teams to consolidate all of their compliance documents in a single place in a dynamic format. PensionBee solves the problem of having lots of pension paperwork, and that’s what Clausematch does in compliance. We’re both on a mission to simplify and deliver the best possible outcomes for our customers: our innovation is a marathon, and we’re happy that we’re working together.”

Eisner and Granat bring added experience, expertise, and leadership to the board, which in August added Smarsh Chairman and Founder Stephen Marsh and FMG Suite Chief Marketing and Experience Officer Susan Theder following K1 Investment Management’s USD120 million strategic investment in company.
 
Amy Kadomatsu, CEO of ComplySci, says: “As an organisation, we are truly gratified to welcome two more board members with the long-standing executive experience and intellectual gravitas of David Eisner and Sari Granat. Both seasoned leaders who have overseen the growth of nascent technology companies into highly valued, well respected technology giants, David and Sari are joining ComplySci at a pivotal moment in the company’s history, when our automated employee compliance solutions have never been more necessary for private equity firms, hedge funds, broker dealers and other financial services institutions. Their guidance will be a crucial asset as we execute on our long-term growth and expansion roadmap.”
 
Eisner served as executive chairman of the ComplySci board from 2016 to 2018, including a tenure as acting CEO in 2016. Earlier in his career, he served as Executive Vice President at the investment banking, asset management and investment management firm Jefferies & Co, followed by the founding of TheMarkets.com in 2000, which he led until its sale to The McGraw-Hill Companies in 2010. He has served as an investor, advisor and board member for various startups and growth companies. In his most recent role, Eisner served as Assistant Secretary for Management in the US Department of the Treasury from 2018 to 2021. He is a graduate of American University and the Boston University School of Law.
 
Eisner says: “It’s a tremendous professional milestone to return to ComplySci, a company that I have seen grow from a fledgling startup to the thriving technology leader it is today. With the strategic support of K1, the guidance of the board and the sterling leadership of Amy Kadomatsu, the future is bright for ComplySci, and I am honoured to return for the next phase of its journey.”
 
At IHS Markit, Granat manages over 800 global team members focused on legal, risk, compliance, information security and information technology functions. She joined Markit in 2012 and has built the firm’s compliance and risk function while guiding the firm through multiple transactions, including its initial public offering in 2014, its merger with IHS in 2016, and its pending merger with S&P Global. Prior to IHS Markit, Granat served as Counsel, Intellectual Property and Data Privacy at Dow Jones & Co, followed by tenures at Kaplan Inc. as Associate General Counsel and Vice President, New Media and TheMarkets.com as Vice President, Legal Affairs and Business Development through its sale to S&P Capital IQ. She is a graduate of Yale University and the New York University School of Law.
 
Granat says: “Having watched ComplySci’s growth from afar, I was impressed with the strides the company has made over the years in innovating the technologies that help financial services firms navigate an ever more complex regulatory environment. I look forward to collaborating with Amy Kadomatsu and her team as we chart ComplySci’s growth trajectory for the future.”

This new solution is for teams responsible for the administration and compliance of the fair value process and ensuring that funds’ securities are correctly valued in accordance with the policy set forth by their governing parties.
 
Fair Value Control’s purpose-built workflows provide automation, transparency, and control to the end-to-end fair value determination process. It unifies stakeholders involved in the process providing a centralised solution for monitoring, decision-making, and implementation of fair value prices.
 
This ground-breaking solution leverages the proven pControl funds platform that currently supports over USD20 trillion in assets for mission critical business functions across investment markets. 
 
“The solution addresses a neglected area across the market in terms of meaningful automation both for the operational teams and the pricing committees respectively,” says Robert Proctor, Head of Product – Oversight and Control at Milestone Group. “We have developed and refined these capabilities in conjunction with leading industry players looking to improve upon their existing processes.” 
 
Milestone Group’s new solution is designed for securities valuation teams to provide a more efficient process. It reduces operational risk through systematic controls over often fragmented processes and manual handoffs. The solution also improves governance and provide insights to Fund Managers and Fund Boards. Fair Value Control is constructed for clients globally, with the launch initially focused on the US given industry timelines relating to SEC Rule 2a-5. 

However, the fair value process is common across the industry and the need for a more robust solution is universal.
 
Security valuation teams and pricing committees now have access to standard libraries of validations, controls, workflows and reporting to demonstrate adherence to best practices. 
 
Recent independent surveys and our own observations confirm that there is significant market interest in taking advantage of a specific market standard solution for the fair value process. This implies demand for solutions that are more tailored to the fair valuation process and can help firms to fully satisfy the higher standards, particularly transparency and auditability demanded by market expectations and new regulations. 
 
Milestone Group’s President, Geoff Hodge, adds: “Our engagement with forward thinking industry players has allowed us to create the first off-the-shelf solution for fair value determinations, enabling best practice to be realised within a highly automated environment. This demonstrates our ongoing commitment to innovation to address evolving industry challenges.”