THOUGHT LEADERSHIP Sponsored by Financial Risk Solutions
Fund Valuation Oversight – All talk and all action
How growth, regulatory pressures, reputational risk and competitive tensions are raising the requirement for fund valuation oversight
Exponential growth and complexity in the funds industry over the last ten years has resulted in increased client and regulatory pressure for firms to manage oversight differently in this new paradigm. Talking about ways to satisfy such growth needs to be matched and proved by evidence and action in the back office.
Around the world several governments are swiftly moving ahead with mandatory pension provision, moving much of the cost of old age off the state balance sheet. With these enormous annual in-flows to the funds industry, for example, 8 percent of gross salaries in the United Kingdom and 9.5 percent in Australia now contributing to pensions, comes both a significant opportunity and responsibility for fund administrators. Add to this institutional and corporate in-flows in a world where unicorns (privately held startup firms valued at over $1bn) are created monthly.
Assets under management increased in all regions in 2017, led notably by growth in China and the United States as seen here:
The aggregate of unit-linked Assets Under Management (AUM) in the European Union and Variability Annuity (VA) in the United States reached $5.5 Trillion in 2017 and has been increasing at a five-year Compound Annual Growth Rate of 6.9 per cent, mainly driven from the life industry.
All of this combined means that the industry needs to ensure their back offices or outsourced partners are ready for the steady increase in funds and assets, not only to support growth and maintain operational efficiencies but also because the industry and regulators have no appetite for less than the strongest operating models.
Increased regulatory pressure
Oversight and accountability have been a strong theme across all regulators since the 2009 financial crisis. Today, regulatory pressure is growing as assets under management increase, putting fund administrators and insurers under greater scrutiny than ever before. We only need to look at recent examples from Australia’s Royal Commission, the United Kingdom’s Prudential Regulation Authority reviews or the Central Bank in Ireland’s review of outsourcing, and separately but related UCITS performance fees.
While not all regulators name the detail of offences uncovered, fines levied and the brand of the offending firm, more are adopting this heavy-handed approach which encourages best practice and acts as a significant deterrent to sub-standard operating models. For those jurisdictions that do publish this information, a common theme amongst these breaches is inadequate systems and controls to support and evidence oversight and governance for outsourced fund administration and fund valuations.