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Embrace RegTech innovation to transform investor compliance into a competitive advantage

The life of the Chief Compliance Officer is not getting any easier with respect to the many regulatory and compliance demands placed on today’s alternative fund management community. 

Dealing with diverse issues ranging from tax compliance (in the form of FATCA and Common Reporting Standards) to cybersecurity developments and upcoming regulation in Europe including MiFID II and the General Data Protection Regulation, as well as orchestrating the investor onboarding experience and ongoing compliance commitments, is enough to keep any CCO awake at night. 

However, a practical approach that combines technology with effective communication with the appropriate people can lead to efficiency gains, creating a more streamlined compliance environment that harmonises the way that Investor Relations teams and operations teams interact and, more crucially, supports a smoother client experience.

One of the main aspects of compliance relates to AML, KYC and onboarding. A survey produced by Forrester Consulting*, which focused broadly on financial services onboarding, found that it cost up to USD25,000 to acquire a new client in terms of going through the AML, KYC onboarding process and that it took up to 34 weeks to complete all the legal and KYC requirements. 

When one considers that up to 100 documents might end up circulating between the manager and client related to proof of ID, proof of address, source of funds, tax status, social security details etc., it is easy to appreciate how the whole investor onboarding process can often end up becoming quite a challenge, and one rife with errors. 

The less capable a fund manager is to control all of the moving parts that relate to investor compliance, the more likely it will hinder his ability to bring new funds to market and could, if not managed properly, lead to a sub-optimal, if not poor, client experience. 

“The IR team’s focus is to attract new investors while retaining existing investors providing both with exceptional client service,” says Giles Travers (pictured), Director, Alternative Investment Funds at SEI Investment Manager Services. 

“However, with the increase in compliance and regulatory requirements, the IR team often gets burdened with more and more administrative tasks which distract from their core objectives. The process and costs of converting and supporting investors at the quality desired often gets overlooked when fund managers are reviewing their business objectives and operating model.”

Similar challenges exist for the operations team in respect to investor compliance. For instance, operations may have legacy issues with their systems which were not originally designed to handle the breadth and complexity of the current compliance environment. This can cause friction with the IR team if the operational processes for handling AML/KYC don’t pass muster. 

Three costly inefficiencies

In Travers’ view, there are three main costly inefficiencies as firms grow and manage the investor onboarding and compliance process. 

The first of these centres on communication. If all the communication is being done via email, that type of communication will intensify between the fund manager and prospective investors the further into the compliance process they move. This can create problems in terms of tracking all of the documentary requirements per client. Without having a clear audit trail in place, the CCO will be unable to oversee how the AML/KYC process is progressing and what issues/complications might be arising. 

The second inefficiency relates to people.

The more investors that are onboarded, the more challenging the AML/KYC work will become. This inevitably leads to a situation where the fund manager needs to hire more internal staff. In turn, that adds to the manager’s cost base without really putting it in a strong position to scale the business efficiently or be value-added to investors. As Travers suggests, it could lead to diverging internal responsibilities “rather than trying to lock in an efficient process”. 

The third inefficiency relates to technology. Existing systems for handling AML, KYC and CRM requirements are likely to have been customized beyond their original purpose. 

“Many managers still store sensitive investor data in multiple different silos with no real integration between the different systems. The cost of upgrading those multiple systems can soon become quite unwieldy. If you don’t get the investor compliance process right, not only are you damaging the investor experience, you are also leaving yourself vulnerable to system complexities and manual errors that, in turn, add to your cost base,” says Travers, adding that from a business management perspective, the investor compliance process should not be underestimated. 

If one were to take a straw poll, and ask 100 fund managers, ‘What is the cost of acquiring a new investor?’ the probability is that fewer than half, or even one third, would know the answer. And the simple reason for that is that they lack the system integration to track the onboarding process from start to finish.

Other questions one could ask might include: How long does it take to convert a prospect into a client? What is the accuracy and depth of your investor data? Do you have a full audit trail of your investor communications? Is your compliance process fully documented and adhered to? What is the utilization of your IR staff on core IR tasks?

“People need to think about these compliance issues not only in terms of fund governance but also how it affects the business objectives of ensuring efficient and effective investor relations,” says Travers. 

In Q1 2017, a total of 175 private equity funds launched, having raised USD89 billion, according to figures provided by Preqin. On aggregate, this has pushed the total amount of dry powder to USD846 billion; a significant figure by any account. What this illustrates is that there is no lack of appetite among investors for PE funds. Therefore, those who can make the onboarding experience as smooth and efficient as possible are going to enhance the buying experience for investors and potentially gain a competitive edge over their peers. 

It might not be the most alluring aspect to fund management, but getting a solid, yet investor friendly, compliance structure in place could yield long-term benefits. 

Preqin ran some interesting statistics in terms of how investors are being overloaded by emails and documents from fund managers. On average, institutional investors receive 17 marketing documents per month for private equity funds and 20 documents for hedge funds. And that’s just the glossy, marketing documents, not including all the compliance documents they actually need to deal with. 

Embracing RegTech to streamline investor compliance

To overcome what is clearly a burdensome process, Travers suggests that there are four key aspects to consider. 

First of all, he says, fund managers should have a well-integrated technology platform to handle compliance and scale the business. 

Secondly, “ensure that your technology is flexible enough to keep pace with the changing demands from investors and regulators. 

Thirdly, any technology that you use for investor compliance should also be improving the overall client experience while driving better quality insights and analytics into your business. 

And fourthly, think about what new products you are likely to be launching in the future, and in what distribution channels or markets. Are your systems agnostic to structuring and jurisdictional requirements and capable of supporting business growth, rather than being a hindrance?”

There are two aspects to bear in mind with compliance, according to Travers.

“The first is the initial onboarding process with all the AML/KYC documentation activities that create a smooth investor experience in which you are capturing good quality data from the start. The second aspect is how you interface with your investors, with respect to ongoing compliance requirements, once they have become an investor in your fund,” he explains. 

For example, this is especially important given that tax compliance requirements are substantial under FATCA and CRS. This is more of a data workflow challenge for firms, making sure the data they capture can go through a FATCA or CRS filing in a structured format, ahead of the reporting deadlines. 

If a fund manager does not have transparency on how they are capturing that data, it is just a matter of time before it becomes a real organizational risk. 

The key point here is that compliance is an ongoing consideration, not just something to think about during the onboarding phase. It is vital that the same level of excellence that investors receive during onboarding, continues with ongoing investor reporting and compliance throughout the lifecycle of a fund and relationship with the GP. 

“We help clients by giving them full transparency of their workflows,” adds Travers. “The workflow applications that we’ve built at SEI have come into their own in terms of being able to deliver the more complex compliance requirements such as FATCA and CRS. By streamlining the interactions between investor relations and the operational teams, the clients with whom we work are able to offer an enhanced customer service to their investors as well as gain valuable business insights into the success of their fund products and IR efforts.” 

Improving the investor experience

In an age where technology enables consumers to buy a multitude of products with a single click of a button, asset managers should be looking to streamline and simplify the investor experience.

A professional and informed IR team plays a crucial part in managing that sales process, but investor onboarding and investor compliance are often overlooked areas. 

In order to deliver an automated and efficient investor servicing model, managers must embrace the latest RegTech innovations and put in place streamlined, technology-enabled compliance solutions.

This will, ultimately, deliver a better overall client experience.


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