In response to this service providers have been evolving their offerings to meet perceived needs. In this interview, James Duffield aims to find out Andy Brizell’s views on how the Aztec Group can best help clients.
European alternative asset fund structuring is changing. Whilst political, fiscal and social factors have all played a part, arguably legislative change has been the most fundamental driver across the EU. The AIFMD (the “Directive”) has been in force for one and a half years now and has become the central piece of regulatory legislation for EU focussed alternative funds, in some cases bringing hitherto unregulated managers into the regulatory net and in others, placing additional layers of regulation on already regulated managers. Whether this additional regulation is needed or meets the original goals of the legislation remains up for discussion. What is clear, however, is that in scope managers have to comply with a raft of new regulatory requirements which can be an unwelcome distraction from their core investment activities?
Over recent months and as the practical implications of the Directive become reality, there has been an uptick in the number of service providers offering regulatory consulting and compliance services to help affected managers deal with the practicalities of the Directive. In this interview, I discuss with Andy Brizell whether these solutions are really needed and how Aztec can help clients meet their regulatory needs.
So Andy, I’ve seen a lot being made of regulatory consulting and compliance services over the last few months, what is it all about?
Andy: In short, it’s the service providers’ response to increasing regulatory coverage. Everyone’s aware of the Directive and the additional regulatory burdens that that piece of legislation can impose, but you have to remember that this is just one piece of legislation among many that affects alternative fund managers. Since 2011, there’s been the Bribery Act, Dodd Frank, FATCA, AIFMD, CRD IV (relevant for some) and BEPS. Even Solvency II is driving additional reporting.
There are only a limited number of people working in alternative fund management who are actually interested in looking at this legislation and working up policies and procedures in order to ensure compliance. The result is a skills shortage of sorts which, for a manager, is often easier to fill using external help and expertise, rather than paying for someone to join their organisation. Whilst historically managers could get by relying on lawyers for high level advice coupled with some DIY internal controls, as the regulatory environment becomes more robust, there is an expectation that compliance frameworks and controls will also improve. In this sense, what I think the services providers are hoping to be able to offer with their regulatory consulting and compliance solutions is perhaps cost effective and pragmatic regulatory advice based on practical operational experience of the application of relevant legislation across a number of fund platforms and jurisdictions.
OK, that sounds good, but why haven’t Aztec launched this service?
Andy: Well, the reality is that we already do it, just not under an official regulatory consulting or compliance tag line. The sorts of services being offered include assistance with regulatory applications, AML, including sanctions screening, ongoing compliance support, risk management, training and regulatory reporting; all things that Aztec offers as part of a standard administrative service offering.
As you know, we have strong in-house legal and compliance teams and over the years we have always indirectly provided opinion and analysis on legal and regulatory change either in the form of direct advice to client teams or through slightly less direct means; broadly speaking by re-designing policy environments and internal controls to ensure that administered client structures remain legally compliant. The outcome is effectively the same insofar as clients end up with the regulatory advice that they need in order to ensure that their fund structure remains compliant. I think that if we as a Group choose to deal with regulatory compliance as a stand-alone matter, not only would we be moving away from what we do best (looking after client structures), but we would also run the risk of providing a service which strays into pure advisory work and that’s not what our business is about.
So if we’re not setting up our own regulatory consulting and compliance product line, how are we meeting the regulatory needs of the alternative funds community when it comes to the Directive?
Andy: The answer to that is relatively straightforward; we continue to administer client structures as we always have. For years we’ve been looking after fund structures including, in an advisory context, the entity which many may, when looking at the Directive, consider to be the manager. In Jersey these entities (generally the general partner of a limited partnership based fund) are known as ‘managed entities’ and we’ve applied exactly the same approach to AIFMD compliance in an onshore context.
During the AIFMD transposition process, we sat down with the legislation and effectively designed a new managed entity solution which rather than tracking the codes of practice (in Jersey) or the conduct of business rules (in Guernsey), instead tracks the provisions of the Directive and the level 2 regulations. Whilst this can be offered as a full administration style product, it’s perhaps a bit more versatile than that though as we can also provide specific parts of the product to meet our clients’ needs. For example, if a client wants to continue to administer its fund in-house, we can simply provide a compliance framework and function.
Sounds good, but I’m not sure that I quite understand how this product breaks down; could you explain this in a little more detail?
Andy: Sure, as I mentioned before, the new solution is relatively simple and follows our existing administration model. In the broadest sense therefore we end up firstly with manager administration, where Aztec will provide assistance in establishing the manager, helping with the regulatory application, providing a policy environment and on an on-going basis running the manager (to include basic company secretarial services, regulatory compliance, risk management assistance, accounting and so on). In addition to this, we then provide fund administration which covers the running of the fund platform. Typically, Aztec would assume responsibility for basic company secretarial services, accounting, the provision of a policy environment, investor relations, AML assistance, disaster recovery and IT support and on-going compliance of the same. We can then add depositary services on as necessary.
By using this model, Aztec effectively deals with all of the regulatory requirements imposed by the Directive without the need for disproportionately expensive external advice. In fact, with this solution you only need to have a couple of part time employees (plus a few external directors) in the manager, which makes things very straightforward and cost effective and keeps the substantive advisory entity outside the Directive’s regulatory net. This diagram of a hosted manager shows how the model works in practice.
You can see from looking at the diagram how easy it is to break the structure down. This is great as it allows us to tailor our offering to meet each of our clients’ needs. Some clients want everything provided by Aztec, but others want to pick and choose. For these clients we can, for example, simply provide the compliance function and depositary services. Overall therefore, I think that it’s a flexible solution which meets the needs of our clients well. Clients benefit from regulatory support but in an administrative context with the efficiencies that go with this.
Changing the subject slightly, I’ve heard a lot about ‘plug and play’ solutions recently. Surely they provide a simpler and more efficient solution that the hosted manager route?
Andy: I can certainly see advantages in a ‘plug and play’ solution, but in a standard alternative funds context we’re not convinced that it’s the right solution.
Just to rewind slightly, ‘plug and play’ of course refers to the position where Aztec would set up its own manager and then make this available to any adviser who wanted to raise an above threshold fund. Practically, I think that this solution can be made to work. As you’re aware, under the Directive an authorised manager only has to provide one of portfolio or risk management which means that for a business like ours, where we don’t specialise in portfolio management, we could in theory set up an authorised manager which performs all functions other than this one. Whilst technically this could work, I think that in an alternative funds context ‘plug and play’ will always suffer due to the political, commercial and reputational risks attaching to alternative assets coupled with the fact that there’s a real risk of cross contamination. So, to my mind, yes, we could probably make it work, but the better solution is the hosted manager one.
OK great; all interesting stuff. Any final thoughts on this subject more generally?
Andy: Nothing major really. There’s been a lot of talk about AIMFD compliance over the last few years and the reality is that it’s actually quite straightforward. We’ve always been at pains to highlight the fact that we’ve been performing the majority of the core AIFMD tasks in an offshore capacity for many years now. All the Directive has really done is to have repackaged these under a new regulatory umbrella.
Whilst regulatory consulting and compliance is certainly in vogue at the moment, any good administrator will have been providing these sorts of value added services as part of their existing administration solution, so to suggest that they are something new is, in my view, a little disingenuous. I think that with the hosted manager solution that we are offering, clients will benefit from Aztec’s regulatory expertise but in the same way that they always have; as part of the core administrative offering.
Thank you, Andy. It strikes me that the nature of alternative assets can be very different to transferable securities and that a UCITS-style ‘plug and play’ solution may embed significant risks for clients. If the legal risks are identified though, then it should be possible to limit them with care. More generally, however, a hosted AIFM may provide a more cost effective and long term solution for promoters looking to establish a permanent brand. The level of support provided can be tailored to clients’ needs and reduced over time as internal resource develops. Aztec Group’s core focus remains on administering funds, but we are happy to assist clients reach critical mass through hosting new AIFM.
If you would like to discuss outsourcing to the Aztec Group or are considering migrating a fund or SPV, please contact James Duffield, our Head of Business Development on +44 20 3818 0250.
Aztec Group Guernsey
Aztec Financial Services (Guernsey) Limited
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