Asset managers pressured to enhance oversight of outsourcing partners

Regulatory pressures on asset managers to oversee and govern their outsourcing service providers has become a challenge for the buy-side.

Investment operations teams at buy-side firms are facing regulatory pressures to oversee and govern their outsourcing service providers, according to a panel.

Regulations, such as MiFID II, have highlighted to buy-side firms that they are responsible for compliance and data quality, regardless if they use a third-party provider for certain non-core functions.

“Relying on any partner is a challenge, especially when the regulations have made it clear that we are responsible for the service regardless if we outsource. If that service fails, we have to demonstrate that we can step in and fix it,” said John Marsland, chief operating officer, investments, Schroders at the InvestOps Europe conference in London.

“It doesn’t matter whether your supplier has the best business continuity plan or how many sites they operate across, you have to be able to operate your business without it. The only way to do that is identify overlapping providers and partner with them strategically.

“This means deepening partnerships with a smaller number of vendors, but the expectations of monitoring and governing them is quite enormous.”

Asset managers have to also ensure the data on their funds is accurate, both for regulators and their own end-clients.

Fund administrators and custodians have come under fire from regulators about the soundness of their outsourcing services, prompting buy-side firms to adopt governance procedures in the event that their providers do not provide a sufficient service.

Earlier this year, JP Morgan’s fund administration business in Ireland was fined €1.6 million for three breaches of the country’s outsourcing requirements. The UK’s Financial Conduct Authority (FCA) has also conducted thematic reviews of the business models of third-party outsourcing providers.

However, some providers have brought new solutions for buy-side firms to enhance the governance process of their outsourced providers. Last year, Brown Brothers Harriman (BBH) launched a new tool allowing asset managers to oversee the new asset value (NAV) function performed by their third-part administrators.

At the start of 2019, technology vendor Temenos partnered with Bloomberg to allow its asset manager users to generate their own NAV estimates independent of, and in parallel, to their fund administrators, enabling accurate daily oversight and ensuring continuity of operations in the event of an outage.

Earlier this year, The TRADE took a closer look at how outsourcing providers really operate and differ from agency brokers, and examined what benefits opting for outsourced execution can offer to the asset management industry.