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Considerations when selecting an ACD
Tuesday 31st October 2017
The choice of independent ACD when unitising client portfolios or launching a new product to the market for wider distribution can be a difficult one to make.
If you have no prior experience of working with an ACD, or of the role they should fulfil, then there is a danger that the decision is made without fully appreciating all of the most important factors.
The ACD holds ultimate responsibility, under the regulations and the law, for the funds it launches. For funds launched by an independent ACD with a partner who will undertake the investment management and distribution of the fund that level of responsibility still remains the same. Anyone familiar with the expectations of the regulator and the need to protect investor interests will understand the significant levels of expertise, investment and time required to fulfil a fiduciary duty as vital and wide ranging as that of an ACD; product governance, fund accounting, transfer agency, tax reporting, CASS, eligible assets, target markets, platform agreements, data provision, risk management, liquidity monitoring, MiFID II implementation... the list goes on.
The models employed by different independent ACD's can add to the complexity of comparing them. Where some may carry out all of the duties of an ACD in-house (such as transfer agency and fund accounting) others may outsource. Add the array of different charging structures that can result from these differing models and you could be forgiven for thinking the independent ACD model is not supposed to be understood.
Some ACDs carry out all of the operational functions including transfer agency, fund accounting and pricing. This enables them to retain in-house expertise, understand the full picture and how each element contributes to the overall investor experience. Any function of CIS operation that is outsourced by an ACD (be that administration, distribution or investment management) still remains the ultimate responsibility of the ACD. This means that the ACD must retain sufficient expertise to effectively oversee and challenge the providers of those functions.
Implementing the wave of regulatory change
Ensuring that all parties are acting in the best interests of investors and that the funds and their suppliers maintain the highest standards of regulatory oversight is a substantial task. When business is "as usual" there are many and varied duties to undertake; due diligence, risk management, liquidity monitoring, data provision, platform liaison and so on. As the regulator seeks to build a more trusted and safe environment for investors so the regulatory change continues to arrive at pace. This needs resource, expertise and experience to review and implement.
MiFID II: Although an ACD is not automatically captured as a MiFID firm, certain of the MiFID II
provisions have been gold plated by the FCA and will apply to ACD's. Other elements apply indirectly due to the activities carried out by the ACD or its suppliers. An ACD should engage with its investment managers and sponsors to plan the project of implementing these MiFID II provisions. These include product governance, target markets, cost and charges disclosures, complex/non-complex products and payment for broker research. These elements are all the direct responsibility of the ACD, who should work closely with its partners and suppliers to review the regulation and implement any changes as necessary.
PRIIPS: this new piece of regulation does not apply directly to ACD's for some time. However, find that a number of fund investors are impacted directly (life companies, for example) and
therefore require significant data reporting from ACD's to meet their own obligations under PRIIPs. ACDs should be engaged with large life assurance companies and data providers to assess the reporting requirements and begin its own project to ensure these are supplied. Failure to do this could result in large investors being unable to buy funds.
CASS: the rules around CASS are very complex and open to different interpretations. It has received press coverage recently in respect of one of the larger transfer agency providers. ACDs should be highly proactive in determining the requirements under CASS and is on course to deliver a full client money model during 2017. This means that client money held by the ACD, will be fully covered and reconciled on an intra-day basis as, in our view, is expected by the regulator. We have designed and entered into a market leading solution to the CASS full client money model with our long standing banking providers. Failure to meet the CASS requirements comes with significant consequences for firms which is why we have dedicated a substantial amount of time and money to getting our solution right. This project has received support from our internal teams and our engagement with well-respected legal advisers and trade bodies.
GDPR: the requirements under the data protection act take a giant leap forwards with the new General Data Protection Regulation. If we consider cyber security alongside this we have two major items to add to our governance and board agendas. Our GDPR project is well underway, with senior members of our team conducting internal audits on data usage. Like many changes of this significance we also engage actively with trade bodies and legal advisers so that our decision making and implementation plans are made on a well-informed basis.
In a wider context, the ACD is fully responsible for all aspects of a collective investment scheme's operation, management and oversight. This includes investment management as well as the operational functions. When the functions of investment management and distribution are outsourced, the responsibility for those same functions is not. It is therefore essential, in our view, that an ACD and its partners work closely together and share expertise. As an operator, overseer, investment manager and distributor of collective investments we dedicate time and resource to keeping up to date with industry changes and to helping our partners do the same.
Deeper analysis of an ACD should follow as it is the single most important decision any firm looking for an ACD will make and not fully understanding this or the strengths and weaknesses of an ACD relationship can have a negative impact on the client.
Experienced people will work closely with investment managers and sponsors to ensure all parties are acting as the FCA and investors would expect. They will provide valuable resource for you to call upon for advice and guidance. You will not be left to face regulatory change impacting on the funds alone.
Independent ACD should not be viewed as a commoditised service. It is a complex service that requires expertise, resource and scalability to be done successfully. In the absence of the full picture, it can be easy for the choice of independent ACD to partner with to be treated like the choice of utility provider, based on cost rather than value. Consider why your clients have chosen your firm to help them manage their financial affairs and ask yourself whether your choice of independent ACD should be based on similar criteria.
Any firm contemplating using a host ACD firm should be asking all of these questions and ensuring they are fully satisfied with the responses provided.
Lloyd Expert Consultancy Ltd provide this full analysis and assessment for clients on an individual ACD basis but also on a wider market basis that takes all the pain away. Also we do not send out standard RFPs we tailor and bespoke questions to the ACD that is important and highlighted by the client.
Our job is to ensure, through due diligence, that an ACD is fit for purpose and can provide the necessary oversight and functions required. Get in touch today info@lloydexpert.co.uk