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Regulatory pressure sees quarter of firms planning NAV oversight

City_of_LondonThe UK asset management industry will be busy getting its house in order following the UK regulator’s recent asset management market study. Yet for some operational professionals, regulatory action from nearly four years ago is still reverberating.

A 2013 thematic review by the Financial Conduct Authority (FCA) put an emphasis on how asset managers monitored their outsourcing providers who carry out critical functions, such as corporate action processing or calculating net asset values (NAVs).

According to a recent Milestone Group survey covering 30 UK asset managers with £1 trillion (€1.2 trillion) in managed assets, 40% of the firms had enhanced their outsourcer oversight systems in the past 12 months and a further 40% planned to review their systems in the next year.

If this suggests a sudden urgency around oversight, then there are several drivers, according to Paul Roberts, a regional managing director at Milestone Group.

A wider international regulatory interest is one. “Regulators in virtually every jurisdiction are raising their level of focus on outsourcing oversight pretty consistently,” he said.

This was reflected in last year’s Central Bank of Ireland outsourcing review that found between 48% and 61% of fund administration activities were being carried out by service providers.

The Milestone research also found that when asset managers changed third-party administrators, merged with each other, or saw growth, these events also triggered outsourcer oversight reviews.

But the simple fact that technology vendors had responded to the oversight challenge with solutions, such as NAV checking, was another spur, Roberts said.

Milestone has won clients such as Schroders and Janus Henderson with its pControl Oversight Solution. Other firms offering oversight tech include vendor Fidessa and asset servicer State Street, to name a few.

Roberts said a key aim for technology solutions was the reduction of time spent by operations professionals on checking often extensive lists of NAV calculations caused by proliferating share classes in recent years.

“Firms would have to have an army of people to look at every fund and every share class. They are looking more and more for automation,” Roberts said, adding that automation had freed up operations staff to carry out other tasks, such as trend analysis and benchmarking.

The FCA originally found that asset managers with many funds on offer and who outsourced the daily NAV strike to service providers had, in some cases, as little as 30 minutes to feed price data to fund distributors after NAVs were produced, meaning some firms neglected to carry out checks.

The FCA was not happy – particularly as retail funds were most exposed to any errors.

 “It is not acceptable for firms to fail to retain the necessary in-house valuation expertise post outsourcing. In the absence of adequate oversight, valuation errors could occur and investors in the fund could miss out on returns they should have received,” the FCA said in its ‘Outsourcing in the asset management industry’ review findings.

Milestone found that 60% of firms it surveyed had found NAV issues since the review, but those with oversight functions had caught all of them.

Fairly typical problems for striking a NAV can include missing some form of income that is due to a fund; incorrect holding values for fund constituents caused by a missing trade; or large flows into or out of a fund.

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