Ensuring compliance with client’s Investment Management Agreements (IMAs) and/or Prospectuses is a major headache – yet it is core to the institutional investment industry.

Too many checks are done manually: How can they be automated?

1. The Challenge

In an increasingly automated world, it is surprising to find that some areas of financial services are highly manual.

Investment Management Agreements (IMA)/Prospectus compliance is one of those areas which should be highly automated but investment managers, fund administrators and custodians are still using a mix of manual checks and technology with spreadsheets and emails.

There are several elements which prevent the full automation of IMA/Prospectus compliance:

  • Functionality – some calculations are highly complex, especially comparatives to benchmark and fixed income credit rating rules
  • Data – IMAs/Prospectuses can require data that is not available in a firm’s data master, especially benchmarks and obligor/guarantor details
  • Administrative – a lot of clauses in IMAs and/or Prospectuses relate to how the account is managed, how investments are selected and who manages the investment portfolio

2. Prevalence of Manual Checks

Checking quantifiable rules is easy, provided the required data is available. The problem is how to monitor and manage the requirements that don’t fit on the current investment restriction systems.

The IMA is not a “marketing document” but is used by clients to try and tie down the investment manager. Some investment managers signed IMAs without considering the practicalities, or cost, of ensuring compliance.

Once the account is funded, it is up to the operations team to figure out how they will manage and monitor it. Interestingly, the cost of supporting complex IMAs is rarely taken into account when calculating the management fees.

With an emphasis on account opening and not asking prospective clients too many awkward questions, the only practical approach for most operations teams is to implement manual checks on client accounts.

3. Sizing up the Problem

Just how hard the IMAs and Propsectus clauses are to manage?

A quick look at some examples will illustrate the necessity of periodic monitoring and highlight the practical challenges:

  • Judgmental – “Don’t invest in companies with poor environmental standards.”
  • Vague – “Generally/usually/normally, the Manager will only hold investment grade debt”
  • Trading – “Cross trades are not permitted”
  • Process – “The Manager will review the portfolio against the ‘30 Best Buys List’ monthly and rebalance accordingly”
  • Administrative – “The Manager must notify the client within 30 days of changes in the ownership of the Manager or changes to senior management”.

Firms have to implement manual checks and processes for requirements listed above, sometimes called “Text Rules”.

“It’s Not What You Know, It’s What You Can Prove” Denzel Washington, Training Day

The problem is that manual checks and processes are expensive to administer, hard to evidence and easy to get wrong. If you can’t prove what checks were performed, then you might as well not bother checking!

4. GRC-Maestro: Checking the Uncheckable

Our Governance, Risk & Compliance platform, GRC-Maestro, neatly fills the gaps in your current IRG system(s): Investment Compliance

GRC-Maestro formalizes the manual checks you are performing as well as flagging potential breaches. The inbuilt case management functionality means potential breaches are investigated, classified and resolved – everything is controlled!

In summary, GRC-Maestro ensures:

  • Checks – performed when specified
  • Recordkeeping – results of checks are recorded
  • Incidents – potential issues are flagged, investigated and assessed as a breach/non-breach
  • Escalation – material Incidents are escalated
  • Resolution – breaches can be managed and resolved
  • Reporting – management has full visibility of checks, issues, breaches, etc.

We would be delighted to show you how we can provide a super quick and good value fix to cover your gaps.

The great news is that GRC-Maestro is available on the Microsoft cloud which mean there is nothing to install, no hardware or additional licenses. Your only cost is a single and low, annual rental payment.

Using GRC-Maestro means your firm can keep your IRG systems without replacing or upgrading. It is almost the end for manual checking.

5. Conclusion

It is unrealistic to think that manual checking of IMA/Prospectus clauses can be automated until IMAs and Prospectuses are written in a way which makes them systematically checkable.

Manual monitoring isn’t going away – IT offers formalization and record keeping

Given that the financial services industry has failed to impose standardized IMAs/Prospectuses on investors, we do not see this situation changing in the foreseeable future. Indeed, individual firms can only succeed by offering unique services to their clients.

The only practical approach for financial services firms to evidence and prove their compliance with IMAs and Prospectuses is to formally record the manual checks they have to perform – there is no end in sight for manual checks but there is an end in sight for unstructured and informal manual checks.

About the Author

Adrian Pay has specialized in financial regulation for over 20 years, working in the UK, US, Hong Kong, Singapore, Japan and Luxembourg. He has lectured around the world on a range of AML/Compliance topics and is passionate about learning and sharing his insights.

Adrian was a co-founder of LatentZero (now Fidessa BuySide) and is a Director of Dynamic-GRC, the leading RegTech solution provider: www.dynamic-grc.com

If you have questions, comments or suggestions Adrian can be emailed on: apay@dynamic-grc.com

Adrian Pay

Author Adrian Pay

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