With operational resilience a key area of focus of the UK’s Financial Conduct Authority (FCA) business plan for 2019/2020, Paul Roberts, CEO, Milestone Group explains that there will be a significant impact on compliance teams at investment trusts, OEICs, specialist funds and ETF funds, and particularly for those individuals responsible for the NAV process.
“The plan has made clear that the individuals responsible must have a deep understanding of the delegated activities and a contingency plan for an outage. Therefore, firms will have to consider whether they have effective oversight tools and management information to meet their fiduciary responsibilities,” states Roberts (pictured). “As we are frequently reminded, you can outsource the function, but you can’t outsource the accountability.”
In most firms today the responsibility to protect the firm, its clients, and the overall market during a NAV disruption are the oversight team, the very same people who protect against NAV errors daily.
However, for many, oversight resources are stretched in an outage scenario and the backup or contingent NAV process often relies heavily on tactical solutions, spreadsheets and manual processes that are liable to user error or discontinuity, especially over an extended outage.
Roberts explains that if a third-party administrator is unable to deliver a NAV, it is the fund that will feel the brunt of the outage and will be responsible for ensuring investors don’t lose out financially.
“The fund must ensure that those investors positions are put right, and the process for identifying holders and compensating them is time consuming and costly, not to mention reputationally damaging,” adds Roberts.
While the FCA business plan does not change the fiduciary responsibilities of board members and compliance teams, it is a timely reminder with the extension of the SMCR regime to Asset and Wealth Managers coming in to force later this year.
The plan is part of a wider trend amongst regulators, each moving towards increased operational resilience. The European Securities and Markets Authority (ESMA); Luxembourg Commission de Surveillance du Secteur Financier (CSSF); and Central Bank of Ireland (CBI) have already introduced similar regulations, and it is a global concern to all major regulators.
Firms have taken a variety of actions including updating operating models, control frameworks, policies, and peoples’ skills, according to Roberts. “The key is to think of operational resilience as a holistic programme. It should extend beyond internal functions to include those of external suppliers, to achieve resilience in the operating model across front, middle, and back office functions independent of corporate boundaries,” he says.
Milestone Group recommends purpose-built platforms with specific capability to produce a contingent NAV on-demand while providing industry best practice for oversight. It allows a firm to manage disruptions without stress with no ‘cold start’ when a contingent NAV calculation is needed.
“The industry and regulators are raising the bar on acceptable market practice in relation to oversight and backup/contingent NAV. Funds should be able to prevent, respond to and recover from disruptions, but in order to insure against a future administrator outage or failure. They will also need to communicate these plans to regulators, customers and the wider financial community,” adds Roberts.