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Fund depositaries come under the regulatory spotlight: FCA discussion on asset management reform

London 17th May 2023
The Financial Conduct Authority (FCA) is looking to scrutinise the work being done by fund depositaries as part of its consultation on how to update and improve the UK’s asset management regime.

Abi Holland, CEO of INDOS Financial, a JTC Group company, looks at some of the challenges facing depositaries, and how the existing model could be improved.

The depositary plays an integral role protecting investors under the EU’s Alternative Investment Fund Managers Directive (AIFMD) and UCITS V.

One of the depositary’s main responsibilities is to check that assets being held in custody are properly safekept, and this is subject to strict liability should assets go missing anywhere in the custody chain. Other obligations include monitoring alternative investment fund (AIF) cash flows and carrying out oversight of the fund so as to ensure that the manager is not deviating from their original mandate.

It was hoped by having an extra layer of supervision, especially in the aftermath of the global financial crisis of 2008, that investor confidence in the funds industry would return. Although the FCA notes in its discussion paper that depositary is an important function, it said there have been a number of instances whereby depositaries did not intervene or challenge managers in circumstances when they should have:

“They (depositaries) do not always achieve effective outcomes when conducting their oversight duties. Our supervisory expectations of depositaries sometimes differ from depositaries’ own interpretations of our rules,” added the FCA.

Where are depositaries falling short?

The FCA’s criticisms certainly chime with some of the comments we have received from asset managers about certain depositary providers.  A number of fund manager clients who have recently appointed JTC Group as their depositary, informed us that their previous providers often got the basics wrong. Common issues included not identifying NAV miscalculations or even mis-stating performance accruals.

The problems appear to be especially acute at depositary-lites acting for non-UK and non-EU AIFs. We have heard some depositary-lites adopt a basic ‘tick box’ approach to fulfilling their AIFMD responsibilities, which is a disservice to both managers and investors alike.

One of the industry’s biggest concerns about depositaries is around how they manage conflicts of interest in some of their oversight responsibilities, particularly when it comes to monitoring service providers.

There is certainly cynicism about whether depositaries – which are owned by global banks or fund administrators – would call out malpractice at their parent groups, especially if this could potentially result in serious regulatory consequences. It is vital therefore that there are checks and balances in places, so that depositaries are truly independent from the administration arm of the business.

This is something which JTC Group takes very seriously. Firstly, INDOS has a separate regulatory license to the rest of the group, and is functionally independent from the administration business. In many cases, there is also little overlap between clients of INDOS and the wider JTC Group. In those rare instances where we do have mutual clients, these conflicts are carefully managed.

Depositaries need to make structural improvements

In its report, the FCA appears to support clarifying the rules around depositary, as it relates to the systems and controls providers should have to identify potential breaches – together with the actions they should take in case any problems are discovered at the manager.

The FCA has also said it will outline its expectations on the type of resources and knowledge depositaries ought to have, along with how they should conduct some of their oversight responsibilities, including monitoring AIFM’s liquidity management and their pricing and dealing in fund units. These are initiatives, which JTC Group fully supports.

It is clear the FCA wants depositaries to adopt a more hands-on approach towards oversight. By doing so, investors will benefit from greater protection. With competition for investor assets intensifying, those managers which can demonstrate to prospects that they have proper safeguards and controls in place will certainly be at an advantage.


To find out more about the depositary services provided by INDOS, please contact Abi directly or visit our dedicated page.

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