When it comes to due diligence of counterparties in the fund industry, there is a glaring lack of standardization. Compliance officers often find themselves with the ‘goldilocks’ dilemma: if they do too much, they might inadvertently contribute to setting a too high industry standard, if they do too little, their company may be fined. But, the truth is, it will take the industry some time to figure out what is ‘just right’.
However, regulatory demands increase constantly, particularly regarding investor protection and KYD, and there is no room to wait and comply at a later stage. We need to rely on what is emerging as a common base and find efficient work methods. Using tech-solutions as a tool to improve governance, risk and compliance processes to meet the regulatory requirements can be a great way to stay ahead.
It is unlikely there will ever be one “perfect” solution. Therefore, the way to go is to start with small steps, test each step, learn and improve as we go.
To modernize our industry, we must be agile
The term “agile” may just sound like the buzzword of the day, but it actually deserves some consideration. As fund producers and distributors need to service the end investor in the best ways possible, internal processes must keep up with service standards. Scalability and true businesses growth require agile solutions that reduce cost and maximize efficiency.
With any number of regulations to adhere to, it can be downright scary to think of changing a process when we are quite literally using all our energy just to ensure nothing slips through the cracks. When conducting due diligence and risk assessing counterparties, many of us just manage to ensure that all the boxes are ticked. There are seldom resources left to search for a better way to tick those boxes.
Including technology in your work methods can make them more efficient and allow existing teams to do more value-adding tasks. Today, RegTech and FinTech tools are part of most company’s risk and compliance strategies. They improve data quality and user experience as well as maturing the in-house risk and compliance culture. With a few small steps, start to leverage new technologies in the governance, risk and compliance space of your company.
For example, a key component of MiFID II product governance requirements is establishing a complete product lifecycle. Amongst other things, the product lifecycle must outline the target market and ensure that the client’s needs are being addressed. Regular feedback from both the clients (end-investors) and distributors are essential to ensure that products are meeting their target market. Using a tech-solution for complaints and target market reporting could be one of those better ways to tick the box for client feedback requirements.
Don’t wait, start moving now
Many of us in the fund industry dreamed that a global industry standard would be introduced, but so far this has not happened. It will take time for a universal standard to mature since national regulatory implementation and industry customs differ to some extent. But, it is definitely possible to utilize the current level of standardization. By doing so, we can together contribute over time, to setting a global standard, starting with an EU-standard.
Firms cannot wait for a universal standard to emerge before implementing new processes to ensure compliance with the applicable regulation. It is better to start now, take small steps, test, learn as you go and improve your processes.
If, for example, in your process this year, you go beyond what becomes the accepted industry standard for due diligence you can update your internal processes to align with the industry or your business’ needs the following year. Remember, your internal policies are due for an annual review. In a fast-paced world, internal procedures also need to evolve in an “agile” way.
Technical tools can help you build efficient governance, risk and compliance processes. They are a necessary step to keep up with regulatory requirements. But keep in mind: There is no perfect solution. Taking small steps, testing them and evaluating their success, will get you, and the industry, moving in the right direction.
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