The ManCo industry is facing increasing pressure from regulators globally for greater accuracy and operational efficiencies, with a particular focus on core areas like substance, capital, internal controls and delegation. In this blog, we take a look at the major regulatory challenges for ManCos in 2022.
According to KPMG, the Third-Party Management Companies (ManCos) industry has faced an all-time high regulatory scrutiny over the past year. With more regulatory changes on the horizon, running a fully compliant, efficient and viable ManCo operation is becoming more challenging than ever. Whilst many providers are struggling to maintain competitive advantage and effectively respond to the changing market environment, others are taking the opportunity to transform their business models and unlock economies of scale with the latest GRC technology solutions.
What is a ManCo?
Before we look further into the challenges for ManCos in 2022, we’ll briefly discuss what ManCos actually do and who they serve.
Simply put, a third-party management company or ManCo is an outsourced compliance and risk management provider servicing the asset management industry. Essentially, ManCos help asset managers eliminate the burden of fund governance and regulatory compliance and allow them to focus on their core specialty, namely generating alpha or creating value for their investors.
In terms of the user base, many believe that ManCos are mostly suited for small and boutique asset managers but some of the world’s largest organisations are also taking advantage of their value-added. Whilst bigger companies may have enough in-house regulatory and risk management resources and capabilities, they might still engage ManCo for managing their international Undertakings for Collective Investments in Transferable Securities (UCITS) and Alternative Investment Fund Management (AIFM) funds.
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The challenges for ManCos in 2022
In the past couple of years, following the Neil Woodford fund collapse scandal, Brexit, and a number of funding, staffing and operational discrepancies within the industry, the ManCo model has seen some major scrutiny from regulators across the world. This combined with an increasing pressure to reduce fees, maintain competitive advantage, manage liquidity risks and navigate complex regulatory environments and cross-border operations, makes ManCos one of the most challenging sub-sectors in the financial services industry.
Increased scrutiny and regulation
As mentioned above, regulators globally have been questioning the effectiveness of the ManCo business model, with some taking action in tackling its main drawbacks by introducing a series of regulatory measures and developments. Among the most prominent are:
The Central Bank of Ireland’s Fund Management Company Guidance in December 2016;
Luxembourg’s Commission de Surveillance du Secteur Financier (CSSF) Circular 18/698 addressing many of the same areas as that of the CBI;
The FCA AFM review and
The EU AIFMD review
Interestingly, according to the KPMG Luxembourg’s Large-scale Management Company Survey 2022, “there’s a paradox between the increasing regulatory scrutiny and the level of preparedness of ManCos. While regulatory scrutiny is at an all-time high, only every other ManCo feels well prepared for an upcoming regulatory on-site inspection”.
“Given the additional requirements and in particular the increased on-sight controls that the regulator is implementing, it is becoming more expensive to run a fully compliant operation and to provide a quality service when you act as a service provider,” Daniela Klasén-Martin, Group Head of ManCo services at Jersey-based Crestbridge
Greater competition and fee reduction pressure
The ManCo industry has been on the rise over the past 5 years. In 2020, in Luxembourg alone, there were over 300 registered and licensed ManCo providers as per PWC’s Observatory for Management Companies 2021 Report. The increased competition along with the higher regulatory costs, staffing requirements and demand for greater fee transparency, are putting pressure on ManCos’ pricing models and operational costs.
Higher liquidity risks
The COVID-19 pandemic and the following market volatility resulted in higher liquidity risks and redemption issues for management companies. The European Securities and Markets Authority’s (ESMA) 2020 Common Supervisory Action (CSA) assessment revealed that in the case of Liquidity Risk Management delegation, there was insufficient delegation monitoring and due diligence.
According to ESMA’s official ‘Guidelines on liquidity stress testing in UCITS and AIFS’, liquidity stress testing (LST) should be properly integrated and embedded into the fund’s risk management framework supporting liquidity management, and be subject to adequate governance and oversight that involves effective reporting and escalation procedures. And where the manager delegates portfolio management tasks to a ManCo, particular attention should be paid to the independence requirement, in order to avoid reliance on or influence by the third party’s own LST.
As ManCos are expected to face even greater scrutiny and increased regulatory focus on liquidity in the future, organisations should ensure they implement a robust liquidity risk management framework, considering the nature, scale and complexity of the funds(s) under management.
ManCos have been subject to a lot of criticism and scrutiny over the past couple of years and many lead asset managers and pension funds have started to question the delegation function. As a result, there have been speculations about possible consolidation in the sector and insourcing or bringing the ManCo function back in-house.
According to Sean O’Driscoll, Luxembourg head of Universal-Investment, to survive the challenging market environment and maintain a competitive advantage, ManCos “will need technology to provide scale and perform governance at the highest level.”
ControlNet allows organisations to establish a solid, evidence-based digital oversight system that can demonstrate and prove appropriate controls are in place within the 1st line whilst complementing and substantiating risk mitigation (risk assessments performed by the 2nd line) in a cost-effective, secure and sustainable way.
If you want to learn more about how ControlNet can help you deliver economies of scale, click here to arrange a brief demo with one of our team.
“To be a trusted partner of choice, ManCos will need technology to provide scale and perform governance at the highest level.” Sean O’Driscoll, Luxembourg head of Universal-Investment
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