After a very testing 2020, 2021 brings different kinds of challenges for independent asset managers (IAMs) and Trustees. Beyond managing the risks from the pandemic, IAMs and Trustees have to make sure they also bring their risk management and governance system up to speed with FINMA requirements, as spelt out in the raft of new rules in FinIA, FinSA, FinIO and FMIO-FINMA. Now is the time to act, as all the new rules are finally out and in place, with the last piece of the puzzle published in November by FINMA1.
Many IAMs are still in the process of getting their applications and organisations ready, and FINMA has only granted a few licenses so far, which means the bulk of the work is ahead for most organisations. Several things should be on IAMs’ and Trustees’ list:
- Governance arrangements should be adjusted to meet the new regulatory standards: management bodies need two qualified individuals, who must have enough training and experience (at least five years) in asset management. These individuals must maintain their skills through regular continuing education.
- Risk management has to be a proper independent function: This means having a formalised risk framework. The framework should categorise the main risks the IAM or Trustee is exposed to, as well as the risks at product level where applicable. It could incorporate tools such as heat maps to determine whether each inherent risk is high, medium or low. It should also identify what mitigating mechanisms already exist, and therefore how high the residual risk is.
- Defining the IAM or Trustee’s risk appetite: Once all the risks are identified, the IAM or Trustee also needs to define its risk appetite and associated Key Risk Indicators (KRIs), to be approved at the highest level.
- Relying on an effective internal control structure: Finally, the IAM or Trustee should have an effective internal control structure in place to ensure that all risks are controlled and stay within the risk appetite limit, and that all legal obligations are met.
Meeting all these requirements is key to securing a licence to operate as a portfolio manager or Trustee and get affiliated with the supervisory organisations approved by FINMA. Beyond the obvious conditions around domicile, minimum capital and appropriate level of own funds, all the candidate’s organisational arrangements will be scrutinised. Licence applications therefore necessitate careful preparation and checking before submission, so that the process does not become long drawn out or produce unwelcome surprises.
The risk management requirements in the new normal can be quite onerous for small structures. Some firms might want to consider outsourcing the risk and compliance function, while of course retaining overall responsibility for these functions. Another model might be to delegate the deputy risk and compliance function to an external organisation, to make sure a backup is always available and broader expertise is on hand if needed.
Once the proper set up is in place, the asset managers also have to make sure that all the legal provisions on their interactions with clients, as laid out in FinSA, are met, too. For instance, assessment of appropriateness and suitability of clients, and customer segmentation, need to be thought through. The Act also contains other provisions around customer care. Asset managers could argue that the duty of transparency and care for clients is nothing new but the regulation is quite specific about what is required to comply. This is also true for best execution of client orders. All the conduct of business area is therefore worth revisiting.
To make a long story short, IAMs and Trustees will need to focus on governance and risk management arrangements to secure a license, as well as conduct issues in order to comply with the new legal framework. Given the challenges that this poses for smaller IAMs and organisations not used to prudential supervision, it is better to start tackling the task now despite what seems to be a comfortable transition period.
In order to ease implementation of the new requirements, reduce the demands on your organisation and benefit from a highly experienced risk and compliance team, Deloitte proposes a new service, flexible and tailored to the needs of each IAM and Trustee.
1 FMIO-FINMA published on 12 November 2020
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