By Wayne Green, Joint Managing Director of IFSL Fund Services
The role of the independent Authorised Corporate Director (ACD) has never been more important.
Independent ACD companies work with wealth managers, investment boutiques and other businesses and make it possible for them to sponsor their own funds using the open-ended investment company (OEIC) structure.
The ACD does this by taking on legal and regulatory responsibility for the fund, while the fund’s ‘sponsor’ concentrates on distribution and in many cases the investment management role.
Anyone familiar with the FCA’s expectations of the ACD role and the need to protect investor interests will understand the levels of expertise and resources necessary to properly fulfil such an important fiduciary duty. There is no doubt too that scrutiny of the role will increase, particularly in light of the regulator’s Asset Management Market Study.
The list of ACD responsibilities is a lengthy one, including compliance and governance, fund accounting, transfer agency, tax reporting, eligibility of assets, platform agreements, data provision, risk management and liquidity monitoring.
Wave of new regulation
At the same time, a wave of new regulatory requirements are coming into force and the ACD has an essential role in ensuring fund sponsors understand these and implement the necessary actions. This is why the role of the ACD has never been more important and it is vital for businesses to ensure they are working with the right one.
MiFID II, which comes into effect in January, is currently at the forefront of many minds in the funds industry. It has significant implications for funds and ACDs, in areas such as product governance, identification of target markets, disclosure of costs and charges, differentiating complex/non-complex products and payment for external investment research.
Meanwhile though, another set of EU regulations, Packaged Retail and Insurance-based Investment Products (PRIIPS) will also bring additional responsibilities. The list does not stop there, of course. The FCA’s Asset Management Market Study will set requirements for the number of non-executive directors on the boards of ACD companies, CASS rules on client assets require interpretation and action, and the new General Data Protection Regulation requirements, which come into effect in May, will have significant implications for any business holding data about individuals.
Fund sponsors will want to ensure their ACD is more than able to meet the challenge of handling this level of regulatory change. However, understanding the capabilities of different companies and how they compare can be complex. Some will perform all ACD duties in-house, others will outsource responsibilities such as transfer agency and fund accounting.
Key questions to ask an independent ACD
To allow meaningful comparison, there are a number of key questions to ask about ACD service providers:
• Perhaps most pressingly, given the scale and pace of regulatory change, what resources and expertise do they have to ensure they can keep track of new requirements, interpret them and implement all the necessary changes? Will client companies face additional charges for this?
• Can they keep up with the growth aspirations of your business? For example are their fund accounting and transfer agency systems scalable and can they meet capital adequacy requirements as you grow your assets?
• What expertise do they have in the operation and management of collective investments? Do they carry out all functions in-house? If services are outsourced do they have the expertise to robustly oversee their service providers?
• How financially strong are they? Do they have sufficient cash or public indemnity insurance to cover potential liabilities arising from errors?
• Will the ACD firm’s culture provide a good fit with your own organisation? How will the ACD’s team interact with your firm and help you to grow and understand the commercial and regulatory world of collective investment schemes?
• Finally, and very tellingly, based on what you know about this ACD business, would you invest in it?
Different models of independent ACD business will work for different companies, but we believe asking these questions will help a business make an informed choice.
Providing such a complex service requires expertise, resources and scalability, and the sensible approach when selecting an independent ACD is to base the decision on value rather than cost. It is perhaps worth considering why clients chose your firm to manage their investments and asking yourself whether your choice of independent ACD should be based on similar criteria.
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A version of this article first appeared in the December 2017 issue of Portfolio Adviser magazine