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Listed Funds and the issue of ever-increasing regulation

30th Sep 2021
For those of a certain vintage the financial industry has changed an awful lot over the past couple of decades

The global financial crisis, in addition to several high profile events such as the dot.com bubble, sovereign debt in Europe and now a pandemic have placed ever higher scrutiny on service providers and institutions.

Regulators who may have been accused of being asleep at the wheel very quickly responded to political pressure by introducing requirements that now seem commonplace. MIFID, AIFMD and MAR to name just a few, alongside ever evolving AML requirements have placed responsibility firmly with fund managers to protect clients and ensure compliance with laws and regulations.

The burden for Listed Funds

With the increase in regulation came an increase in paperwork, a reliance on spreadsheets and with them an increased need for resources, which some in the industry have blamed for the ongoing consolidation of firms and further barriers to entry or rising costs to continue operating.

Does that mean that regulation is bad? Of course not. The vast majority of companies had exemplary client-focused processes and procedures in place long before additional regulation was introduced. Recent frameworks have just provided a further security blanket. However, the rise in risk and compliance has impacted companies that have not addressed them in advance with the necessary tools – human and technological.

Take AML as an example. AML rules are the front line in the fight against financial crime and funding terrorism but can be complicated and time-consuming for organisations that do not have the proper resources and correctly skilled staff.

AML concerns can be mitigated by firms with effective technology that identifies high risk factors during onboarding. Alternatively firms may enter into a partnership with an outsourced provider as the implementation and testing of robust policies and procedures contributes to the compliance of rules but comes at a cost.

Verification and certification can also prove challenging when looking at requirements such as source of funds and source of wealth. This information may not always be easily accessible but can result in a potential rule breach. In order for firms to remain compliant they must address people, processes and procedures. Covid has further exacerbated problems with the ability to certify documents. However the adoption of digital validation tools has provided a way forward for companies that embrace the technical advances.

While looking at technology, it is important to identify the correct system as software solutions are often tailored towards one particular type of client. Especially for fund administrators, the right technology solution is needed to cover the various types of investors and complex structures. Monitoring rules need to be interpreted correctly and applied to different types of client. Good fund administrators deal with this by applying a risk-based approach, supported by appropriate technology, which increases efficiency, reduces the possibility for errors and dramatically improve data flow while reducing the environmental burden of manual compliance processes.

The regulatory environment is a complex and sometimes confusing place but the rules are clear for firms with well-trained, qualified staff who have access to the best technological solutions. The funds industry does not have an issue with regulations. Changes in regulation push the best companies to keep improving their internal practices, identify future challenges and utilise the best new digital systems for the benefit of clients.

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