IMS Market Update - February 2013

Welcome to the IMS Group's first quarterly Market Update of 2013. The update aims to share our market knowledge and solutions with service providers in the asset management and securities industry and to discuss some of the ways we are assisting your clients.

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IMS Regulatory Forum

IMS held its' second annual Regulatory Forum at Bloomberg's London offices in January. The forum set the regulatory landscape for 2013 and attracted 300 delegates from the asset management industry. Our pre-event survey highlighted a number of key concerns amongst the industry:

63.8% of respondents felt that AIFMD would have the most impact on their firm's business activities in 2013.

Most respondents felt that they would need to make the most changes to their Governance arrangements when dealing with regulatory issues in 2013, in particular AIFMD.

Other business activities that respondents felt would require the most changes to when dealing with regulatory developments in 2013 were Operational Risk, Remuneration arrangements, Training and Staff development and Financial and Capital Adequacy.

Regulatory Developments

With the pre-Christmas publication of the level 2 implementing measures of the Alternative Fund Managers Directive ("AIFMD"), the industry is now battling through the barrage of policy papers. With key concepts such as delegation and, in corollary, the 'letter box' question open to debate, it is critical and of course evitable that these give way to practical solutions and considerations. Indeed, there is now enough substance to begin serious preparation.

In the sound and the fury of the AIFMD we should also remind ourselves that existing obligations are perhaps more important than ever with the UK regulator increasing efforts around topics already considered well established, such as Conflicts of Interest and Outsourcing. For many firms now preparing year end information, it is imperative that key MIFID policies are refreshed and reports such as the individual capital adequacy assessment ("ICAAP") reviewed. Those subject to the latter (i.e. BIPRU firms), will need to ensure that their pillar 3 disclosure is also updated and replete with the latest remuneration information and either posted on their website, on a hosted site such as ours (see pillar 3.eu) and or included within their audited accounts.

The Financial Services Act 2012 will come in to effect on 1 April 2012 and give life to the Financial Conduct Authority, the body that will regulate all but the very largest of financial services firms. All should be hearing from the UK regulator in Q1, to advise of the conduct and prudential category in which a firm will be placed. This will be based upon how it is considered in respect of systemic risk to the market. Most in the alternative space will be in the lowest risk category but do not take this as a sign of indifference. The regulator has stated its intention to make its presence known in the space.

FSA Authorisations

Over the course of 2012 and into 2013, we have felt the effect of regulatory change through the scrutiny and process within applications and regulatory transactions at IMS.

Due to the events surrounding the upcoming division of the FSA, splitting into the FCA and PRA, many processes are taking notably longer to achieve. Earlier in the year it was noted that the initial contact from the FSA, the allocation of the Case Officer and receipt of first comments on an application, was taking longer than previously seen, at around four to six weeks. Now however the allocation process is taking up to the FSA internal guideline timescale of eight weeks.

The overall Application process is also coming under ever more intrusive scrutiny. Following the far-reaching effects of various pieces of US legislation (namely Dodd Frank), the FSA have now pushed this global view trend and started to look beyond their immediate shores and into the offshore corporate structures and funds that many Applicants seek to put into place. Key themes of the review process include questions around corporate governance and the effective control of, and by, offshore structures. By way of example, the Directors of new Funds are increasingly coming under scrutiny for the numbers of directorships they hold and their independence.

Structures that worked before may now be below the standard that the FSA expects of the full business model. Although the Applicant itself may be sound and fully ready to be compliant, if the offshore entities (and in particular, Funds) are not found to be satisfactory, the regulator is cautious of approving the Applicant itself.

Any new start-up that is not FSA authorised by 22nd July 2013, or which has not filed their FSA application with the FSA (or from April 2013, the FCA), will need to prepare and file a new style AIFMD application. The date for new-style applications coming into effect prior to AIFMD D-day is yet to be determined, as is the level of further queries that these applications will face.

Until the level of implementation and the time-scales for transition become clearer, new FSA Applicants need to be better prepared than ever and aware of what is coming to mitigate potential effects on their own application process.

Source – IMAS Corporate Finance

Mirabella Regulatory Hosting

2012 was a significant year for Mirabella as its client base expanded significantly, reaching 23 clients at the end of December 2012 (see breakdown of clients below). As AIFMD has been looming closer, the market developed a greater appreciation for an independent risk function, which has been a cornerstone of the Mirabella solution for years. As a result more managers have been attracted to the Mirabella solution, and the investor community is also becoming increasingly aware of the benefits of this solution.

AIFMD has defined risk amendment as having equal importance to portfolio management, and as such all investment managers will have to review and probably enhance their risk governance and documentation. Mirabella is developing a number of AIFM solutions which will make greater use of its risk expertise, as not only new managers but existing ones will be forced to consider how to prove the independence of the risk component of their business. Mirabella will make itself available for managers wishing to delegate out their risk management responsibilities. Furthermore, in some cases, existing managers may choose not to become AIFM, and will seek to assign that role to another entity. Mirabella is currently designing a solution for managers who wish to explore this possibility.

EvenWheel Solutions – Compliance Software

The EvenWheel team had a busy end of 2012, with a steady increase in our client base and continued enhancements to our products. Our development team is now working on a ground-up overhaul of our flagship ComplianceTrak product focusing on enhanced workflow capabilities and improvements for our global users. At the end of 2012, we released the UK and broker dealer versions of the ComplianceTrak calendar, which has built in regulatory logic for FSA and FINRA registered firms (where previously it was focused solely on SEC registered advisers). We continue to work closely with our colleagues in the UK to develop functionality which meets the needs of advisers and brokers in the UK.

If you have any questions regarding IMS' Regulatory Market Analysis, please contact Stephen Burke or Sarah Donnelly. To unsubscribe from our service providers' newsletter, please contact Louise Yates.