Even before the disruptive market conditions in the recent past, change was accelerating due to the evolving regulatory environment, digitalization and a growing interest in private assets
Overview
For several years, industry players have been motivating for a framework to standardize asset servicing functions, which have evolved substantially over the last two decades. The industry has been forced to adapt to disruptive market conditions in the recent past, such as the health crisis and Brexit, but even before then change was accelerating due to the evolving regulatory environment, digitalization and a growing interest in private assets. The recent “UCI administrator” Circular aims to harmonize the workings of the asset servicing industry, but does it provide much-needed clarity and direction? Pierre-Marie Boul, Norman Finster and Karim Bouaissi zoom in on some of the key takeaways.
Circular 22/811 (“the Circular”) was published by the Commission de Surveillance du Secteur Financier (CSSF) in May 2022 with the purpose of specifying principles of good governance and internal organization for undertakings for collective investment (UCI) administrators. In scope are UCI administrators of regulated and non-regulated entities established in or out of Luxembourg. The Circular fully replaces Chapter D of IML 91/75 wherein UCIs were previously limited to UCITS and Part II funds.
Three considerations for asset servicers
1. UCI administrators in existence at 16 May 2022 can continue as such, but moving forward, all Management Companies, Alternative Investment Fund Managers, foreign Investment Fund Managers, Regulated Luxembourg UCIs and Credit entities wishing to administer UCIs must obtain prior authorization from the CSSF.
2. From 30 June 2023, UCI administrators must report on their business activities annually to the CSSF at the latest five months after its financial year-end.
3. The three main administrative functions – registrar, NAV calculation and accounting, and client communication – and their requirements are spelt out. Importantly, the Circular confirms that tasks relating to monitoring or due diligence/oversight of delegates cannot be delegated.
A glance at some key themes
The Circular sets out common organizational requirements and best practices for UCI administrators and goes into detail on the topics of internal organization, human resources, business continuity, ICT and delegation models. There are some overarching themes to which asset servicers may wish to pay close attention.
Appropriate substance and resources – The UCI administrator must have substance and resources proportionate and adapted to the business. The number of staff should be sufficient to serve the volume and complexity of UCIs administered and to ensure the four-eyes (maker/checker) principle is always applied.
IT systems – UCI administrators are recommended to comply with the principles of Circular 20/750 on ICT and security risk management. In addition and except when the volume and complexity of UCIs administered is low, a dedicated professional software must be used to calculate NAVs. In alignment with Circular 22/806 on Outsourcing Arrangements, for systems based outside of Luxembourg, entities must ensure a secure backup of all accounting and registrar positions is available in the European Economic Area (EEA) at the end of each NAV calculation day and entities shall have not only the necessary technical resources to manage but also an appropriate set of technical procedures.
Documentation – The Circular requires multiple – sometimes physical – documents to be created and reviewed annually. These include business contracts between the UCI administrator, the UCI and delegates, a manual of written procedures covering administration functions, and record-keeping of information flows between the UCI administrator and depositary.
Practical Considerations: Scale up to ensure compliance?
With the new regulation we see clear benefits for asset servicers to have a harmonized and comprehensive framework for UCI administration. On the one hand, the framework clarifies some previous grey areas, such as the scope of the regulation expanding to no longer include only UCITS and Part II funds, as well as more clearly defined requirements for each administrative function. The Circular also cements the approach towards a range of topics that many asset servicers have already implemented, such as ICT risk measures like business continuity, and the use of sophisticated systems and security software.
On the flip side, the regulation calls for stricter application in certain instances. To illustrate, new UCI administrators must request prior authorization from the CSSF. UCI administrators must also request authorization for substantial changes to operating models. The new reporting requirements also mean additional work for asset servicers at financial year-end.
At EY, we have a dedicated asset servicing sector focus which offers a broad selection of services to support the priorities of asset servicers – PSFs, third party management companies and AIFMs. We assist organizations in making sense of the regulation so that they can take the necessary steps to comply and continue to do what they do best.
How EY can help
We can support your compliance with the Circular by performing:
- UCI Administration authorization services
- ISAE certification assessing the effectiveness of your internal control system
- Review and improvement of the Delegation Framework and the related key controls
- Review and improvement of UCI Administration procedures manual
- Software selection and implementation of UCI Administration systems for liquid and illiquid assets
- Assistance with reviewing contractual documentation with delegates and related remediation
- Assistance with reviewing contractual documentation with UCI clients and related remediation
While new UCI administrators must apply with the framework with immediate effect, UCI administrators already existing as of 16 May 2022 have until 30 June 2023 to comply. It is a critical time for asset servicers to consider where they stand and what actions should be taken to meet the requirements.
For more details on the Circular, please click here.
