In our recent Client Focus Group on Distributor Due Diligence clients tuned in to hear from industry experts and to share their own views on the challenges they face in conducting distributor due diligence.
Here are 5 key take-aways:
1. The ICI Questionnaire is a welcomed resource in terms of moving towards industry standardisation.
The ICI Questionnaire reduces distributor workload in dealing with multiple due diligence questionnaires and is helping to unite asset managers and distributors. Asset Managers have different risk appetites and risk-based approaches. Many use the ICI questionnaire and bridge potential local requirements and/or a more risk averse approach with an enhanced KYD process. Anti-Money Laundering (AML) market practice is to use the Wolfsberg Financial Crime Compliance Questionnaire (FCCQ) or a set of additional AML specific questions along with the ICI questionnaire.
2. Asset Managers believe that a central depository is required.
Accessing information is difficult and when a distributor completes a questionnaire, many believe it should then be available for everyone. Greater accessibility and the reduction of duplicated information collection would result in time and resource savings for Asset Managers. A major challenge still exists around how to manage non-responses and a designated market practice would be very beneficial.
3. Industry speakers provided clarification on the expected scope of Due Diligence. From a Luxembourg perspective, the industry still lacks common interpretations and definitions.
Market practice would be to perform due diligence on direct relationships and depending on the risk appetite, some go further collecting basic information and screening on sub levels. This can be challenging as there is probably no contractual relationship in place. In addition, obligations are intended to be transferred down the distribution chain and this needs to be ensured. In other words there is an obligation to assess and monitor each contractual relationship.
From an Irish perspective the Central Bank of Ireland (CBI) expects more oversight on chain outsourcing relationships. Management Companies are now taking a closer look at policies and procedures and the distribution oversight of sub-distributors. This is in addition to requiring reporting from the primary distributor on their oversight of sub-distributors.
4. Distribution has come into regulatory focus in recent years in Ireland with CP86 highlighting distribution as one of six managerial functions.
The CBI’s continued focus on outsourcing and delegation as key areas for supervision and its recent consultation paper on outsourcing, CP138, will undoubtedly have an impact for distributor oversight. The CBI has clarified that delegation and outsourcing are interchangeable terms in their mind. While oversight of delegates may have historically focused on administrators and investment managers, CP138 makes it clear that there must be robust governance, risk assessment, due diligence and ongoing oversight of all outsourced service providers and delegates. Contractual and SLA provisions should be in place and the same requirements apply to both intra-group and third party delegation.
5. Fintech is growing at the edges of the industry.
Technology is providing individuals and institutions access to investment opportunities that were previously only available through an asset management firm. Asset Managers need to leverage RegTech to collect and absorb DDQs. In doing so they need to ensure that when digitalised there is an understanding around the algorithms used and the context, so that they can expand and tailor the due diligence to the audience.
Carne works with many of the world’s largest and leading asset managers to help them simplify distributor due diligence. If you would like to find out more, please contact a member of the team below.
Head of Business Development
Head of Regulation & Client Solutions
Group Chief Product Offi cer & Country Head, Luxembourg