Deloitte today reported findings from the first round of the Alternative Investment Fund Managers Directive (AIFMD) reporting cycle, and offered advice for the second round which will begin this week.
The AIFMD was a European initiative which came into force on 21 July 2011, borne from the perception that the Investment Managers of hedge funds and private equity fundswere not receiving the same degree of financial regulation as the Managers of mutual and pension funds. The Directive therefore seeks to address this gap by regulating fund managers within the EU who manage alternative investment funds (AIF), who manage AIFs established in the EU, and who market the shares or units of an AIF in the EU.
Deloitte claimed that despite the challenges that the first round of AIFMD reporting presented to AIF managers and regulators, the deadline was met successfully and that the next cycle should build on this whilst addressing additional specific points about cost, outsourcing, and the use and purpose of the collected data.
“In the next AIFMD reporting cycle, due to begin this week, efficiency and cost issues loom large," explained Lou Kiesch, Partner at Deloitte Luxembourg. "The fund managers surveyed also face resource constraints in their Risk and Compliance departments, raising questions about how to manage the reporting going forward. The question of whether to outsource AIFMD reporting or to conduct it in-house will also be important in the next cycle. Lastly, questions remain about whether the data requested by regulators is fit for its purpose and whether it could be misused or misinterpreted."
63% of respondents were reported to have found the new reporting 'more difficult' to carry out that expected. However, timelines did not appear to be as long as expected, with the project found to have lasted between three and six months for about a third of respondents and between six and twelve months for the remainder. Deloitte stated that the timelines may however have been affected by the efforts and initiatives of first movers - both the in-house players and the outsource solution providers—who obtained clarification from regulators, which worked in favour of all and allowed the cycle to be shorter or at least to appear more efficient.
The project was said to be 'as expensive as anticipated' by 42% of respondents, with 22% stating it was 'more expensive than anticipated'. Two-thirds of respondents were either absorbing the costs or sharing them with the fund: 42 percent of the costs would be absorbed by the fund managers themselves, rather than passed on, and 25 percent would share the costs with the fund.
Deloitte advised that for the second cycle the 'first mover' effect should be kept in mind when considering how the 'business as usual' (BaU) solution can be best implemented in future developments. In the initial cycle, many reportedly benefitted from the preparatory work carried out by industry majors or service providers who have been actively engaged in the process for up to two years.
The finding from the first cycle revealed a high demand for risk professionals, with 36% of all reporting activity involving risk, as compared to 33% involving operations and 31% involving IT. Deloitte commented that risk professionals are already scarce in Luxembourg and many other financial centres and remain deeply involved with all regulatory activity implemented since the financial crisis, with this additional demand on thier time making risk skills all the more scarce for other activity sectors.
Deloitte stated that scale will provide a useful aid in determining the most cost-effective solution for the future. 72% of all fund managers were reported to have said they would consider outsourcing their reporting activities for the upcoming second cycle. Deloitte claimed that the relative success of the first cycle was due to mutualisation, which is likely to only be available via outsourcing in the next cycle. For 23%, outsourcing was not considered an option, with respondents indicating that since liability remains with the AIFM, the added-value of outsourcing would be limited. According to Deloitte, if fund managers were to remain dependent on the availability of certain scarce resources, outsourcing may relieve some of the pressure.
Deloitte also cited several other data-based initiatives and obligations alongside AIFMD reporting to which European fund managers and financial actors are responding, such as European Market Infrastructure Regulation (EMIR), Markets in Financial Instruments Regulation (MiFIR), Packaged Retain and Insurance-based Investment Products (PRIIPS) and Solvency II. These obligations reflect the move made by global regulators and the international financial industry towards greater financial transparency in the wake of the economic crisis, but reaffirms the pressure on risk departments which must cope with regulatory reporting obligations.
Deloitte additionally stated that coordination among regulators and a more strategic focus will be significant factors in the capacity for fund managers and regulators to meet the new requirements of the reporting process.
