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Outsourcing Compliance for newly established fund managers

Due to cost and time-efficiency many new FS firms are outsourcing compliance, here we briefly look at why.

As the regulatory world has become ever more complex since the GFC (Global Financial Crisis) many smaller firms and startup asset managers are struggling to keep up with the demands of new regulations. 2018 alone has seen MiFiD II and GDPR implemented and we can look forward to increasing regulatory complexity for the foreseeable future.  

Due to this, outsourcing compliance is increasingly becoming a preferred option for many financial service firms who are looking for ways to reduce the complexity of their processes, whilse easing the operational burden for senior managers and investment staff.

Newly established asset managers, in particular, can benefit from compliance outsourcing, with the costs lower than creating an in-house team, plus the added benefit that a specialist compliance firm can accelerate a firm’s launch, either through a quicker turnaround of an application to the regulator, or by providing access to the market through a regulatory hosting platform (sometimes known as an FCA Umbrella).

How does a Regulatory Hosting Platform work? As applying for direct authorisation with the FCA can take up to a year, many firms will use their compliance provider to provide the relevant FCA permissions, enabling them to start marketing or trading immediately. The new firm will be supervised by a specialist that is authorised to perform financial services (such as RiskSave). The new manager becomes an ‘Appointed Representative’ of the established compliance provider. The regulator will hold the principal (FCA Umbrella) accountable for failings in the ‘Appointed Representatives’ activities, and the principal assumes regulatory risk as part of this process.

When outsourcing compliance new managers should ensure:

  1. They have a specialist partner who understands both their compliance and commercial needs;

  2. They are realistic about firm’s current and future requirements. No-one has a crystal ball, but estimates of future needs are crucial to understand the present. Work with your compliance provider to ensure that they are flexible enough to meet your demands as you scale; and

  3. That individuals at the firm are appropriately qualified. It is important to ask, not just what firm to engage with, but who at that firm will manage the relationship.

Outsourcing compliance still remains the most cost effective way to launch all but the most complex funds. The addition of regulatory hosting services can enable firms to get their services to market faster than traditional routes.

Simon Cullen