A thriving fund industry rests on the foundation of a robust regulatory framework, assuring investors that their assets will be safeguarded against misappropriation. Nevertheless, the pursuit of greater protection often accompanies higher fees, prompting investors to scrutinise regulatory requirements for tangible and effective outcomes.
Authorised roles
In Luxembourg and Ireland, the regulatory framework leans heavily on authorised roles within fund management companies to ensure investor protection. Approved by the CSSF and CBI, these roles are held by seasoned risk and compliance professionals.
Among the various roles outlined by regulations, the Conducting Officer (LU) and Designated Persons (IE) serve as prime examples. These senior employees, operating under strict regulations, are tasked with overseeing governance related to risk, compliance, and distribution functions.
Issues
While those appointed to such roles typically possess the requisite experience and skill set to ensure regulatory compliance, challenges arise due to the structure of fund management companies, rendering these roles both costly and, at times, ineffective.
Experience & skills
Regulations mandate a minimum number of authorised roles, requiring them to oversee a diverse range of functions, from accounting to IT. Staffing these roles poses a significant challenge for fund management companies, leading to difficulties in justifying the associated costs.
The market’s shortage of professionals with the necessary profiles, coupled with the substantial responsibilities these roles carry, makes recruitment an expensive endeavor. For instance, a Conducting Officer can command an annual income of up to 200K euro.
Seniority vs Hierarchy
From a legal standpoint, professionals in authorised roles hold seniority and authority in making decisions regarding the governance of funds within their jurisdiction. However, in practice, as many fund promoters originate from abroad, they are often bound by group guidelines.
The limited decision-making power within a group setting restricts their influence, only allowing them to provide precious guidance and overrule non-compliant decisions.
Workload
The workload faced by authorised roles, particularly those working within entities with lean structures, is substantial. Time and resource constraints may hinder meeting deadlines, leading to extensive outsourcing within the industry.
In Luxembourg, 90 percent of the financial sector resorts to outsourcing, contributing to the Big Four’s combined revenue exceeding 1.5 billion euro in 2023. Despite its relatively high cost, the outsourcing process can complicate the oversight duties of authorised roles.
In conclusion, the challenges associated with authorised roles regimes stem largely from the inherent structure of fund management companies and the regulatory landscape. Evaluating whether the benefits of these regimes outweigh the costs to investors is crucial, prompting a reassessment of the balance between investor protection and the economic implications of implementing such frameworks.
Gregory Kennedy is a columnist for Investment Officer Luxembourg. His columns appear every other week. He also works as a business development manager at Finsoft.lu.