Why Fund Managers Should Embrace Outsourcing for Regulatory Compliance

In the dynamic landscape of the financial services industry, fund managers are continually challenged to navigate through a complex regulatory environment. With regulatory standards constantly evolving and regulatory bodies intensifying their scrutiny, the pressure on fund managers has never been greater.

Many are now turning to outsourcing as a strategic solution to managing regulatory compliance. In this insight, we explore why many fund managers are considering outsourcing their regulatory affairs, examining the benefits and addressing common concerns.  

What is regulatory compliance and what does that look like for a fund?   

To put it simply, regulatory compliance is the adherence to applicable laws and the requirements that flow from them. For a fund, this is highly dependent on the type of licence it has and under which regime it operates.  

Typically, the Board appoints a Compliance Officer, approved by the relevant regulatory authority, to ensure adherence to the applicable rules. The Compliance Officer then develops a Compliance Monitoring Plan and implements it throughout the year to carry out a series of checks on various aspects of the fund’s operations. Any findings are then brought to the attention of the Board, for it to take the appropriate measures.  

Why is regulatory compliance so important for a fund? What are the consequences of lapses in regulatory compliance?   

Regulatory compliance is vital for funds for several reasons. Firstly, it ensures that funds can effectively achieve their objectives. Failing to comply with regulations can lead to significant consequences, including loss of investor trust, reduced business activity, and even the withdrawal of the fund's licence. Non-compliance may result in financial penalties, loss of income, and reputational harm to the fund.  

Adhering to regulations is crucial for maintaining investor confidence. Investors prefer funds that operate transparently, fairly, and ethically within regulatory frameworks. Compliance is essential for upholding the fund's intended purpose, and any deviations may result in financial losses for the investors.  

Additionally, regulatory compliance acts as a shield against regulatory action. Regulators enforce compliance to maintain stability and integrity in financial markets. Non-compliant entities may face severe consequences, such as licence withdrawal, fines, or legal proceedings, which can disrupt operations and harm the fund's reputation.  

In essence, mitigating regulatory compliance risks safeguards investor interests, upholds market integrity, and ensures the fund's long-term sustainability. It provides security for steady growth and establishes a framework for sound operational practices.  

What are some common challenges encountered when trying to stay compliant?    

Navigating compliance poses challenges on both internal and external fronts. Internally, there's the issue of increased costs tied to establishing a robust compliance framework, which involves recruiting, training, and retaining compliance professionals and investing in technology infrastructure, as well as the challenge of managing full compliance without hindering business operations.   

Externally, challenges often arise from regulatory bodies themselves. For instance, the application of proportionality, where rules are drafted with larger entities in mind, may lead to unnecessary burdens on smaller entities. Moreover, the complexity and volume of regulatory requirements, including AIFMD, MiFID II, and GDPR, among others, can be overwhelming.   

What are the key benefits of outsourcing compliance services for a fund?  

Outsourcing compliance tasks to a third-party Compliance Officer offers numerous advantages for funds, particularly smaller ones dealing with proportionality challenges.   

In light of this, fund managers are increasingly turning to outsourcing as a strategic approach to effectively manage regulatory compliance and gain operational advantages: