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A Chronicle of the Investment Management Industry

Welcome to the June 2013 EditionInvestmentSolutionsConsultants Ltd

Registered in England andWales, Company No. 08092819

Registered Office:8 High Street,Brentwood, EssexCM14 4AB

Telephone:020 7096 1361

Email:[email protected]

Web site:www.iscltd.co

© Investment Solutions Consultants Ltd 2013

Inside this Issue:

ISC KIIDs & NewStaff

1

The Trouble withKIIDs

2

ISC at SUPRA 3

Response by theIMA: To the“Dear CEO”Letter onOutsourcingRisks

4

Welcome to the June 2013edition of the Chronicle.In this edition we introduceour KIIDs service andwelcome two new consultantsto ISC.Our first article explores theopportunity to revisit,rationalise and improve the

production of KIIDs, whetherproduced in-house or by athird party.The second article is byJulian Baines, our newestrecruit. Julian assisted theIMA recently on theirfeedback to the FCAregarding their ‘Dear CEO’

letter to companies involvedin outsourcing, withrecommendations to improvethe risk and portabilityassociated with theseservices.Feedback on our articles isalways [email protected]

June 2013

The production of KIIDs can berationalised and improved. Suppliershave improved services and theopportunities to make efficiency and costsavings exist.

If you would like to speak to ISC, share inour experiences, improve the productionof KIIDs and lower costs, then pleasecontact us or click here.

Paul Sangster joined ISC inApril. Paul brings with himover 20 years experience ofsuccessfully deliveringbusiness and IT change inthe Asset Management,Securities Services and Life

and Pensions sectors. Hehas an excellentunderstanding of assetmanagement processes andasset classes, includingderivatives as well asextensive experience of both

Julian Baines has recentlyjoined ISC and brings withhim over twenty years’experience in AssetManagement with senioroperational roles responsiblefor Middle and Back Office,Change Management, ITDevelopment and StrategyDesign. Roles included thesupplier management andrisk oversight of outsourcedactivities to enable support of

direct and indirect teammanagement and leadership.His experience covers end toend project management,including vendor selectionand contractual negotiation,and third party suppliermanagement and delivery.

Front Office and SalesOperations for a UK basedcompany with Global assetssupporting primarily a UK LifeCompany.Julian has managednumerous projects both at anindividual and programmelevel with highlights being;building the OrderManagement System forFront Office, the StraightThrough Processing for

Two More Consultants Join ISC

Trade Matching (being firstuser of Omgeo CTMworldwide) and first to launcha PAIF in the UK.Julian joins ISC to providetrusted advice to theInvestment Managementcommunity with hisunderstanding of the end-to-end operating model of theasset manager and serviceprovider as well as thevendor landscape thatsupports our industry.

mailto:[email protected]

http://iscltd.co/administrator/files/1371651059_KIIDS%20final.pdf


The Trouble with KIIDs

ISC have just completed aproject for a well known assetmanager to recommend andemploy an alternativeoperating model for theproduction of their KeyInvestor InformationDocuments (KIIDs). Insuccessfully completing theproject, we uncovered someinteresting points worthsharing.

BackgroundA KIID provides investors withkey information about aUCITS fund and were intro-duced in July 2011. The infor-mation is required by law tohelp the investor understandthe nature and the risks ofinvesting in a particular fund.The KIID is a two-pagedocument intended to providea consistent comparative toolfor investors in the earlystages of selecting a fundand must be read and under-stood by an investor beforethey invest. It includes funda-mental information about thefund in plain, jargon-freelanguage that should be intel-ligible to the average investor.Information is divided into fiveareas: Objectives and invest-ment policy, Risk Profile,Charges, Past Performance,and Practical Information.The KIID has to be updatedon an annual basis within 35business days after acalendar year end, and intra-year where a significantchange within the fund hasoccurred.

The challengeKIIDs are a necessary evil!They have to be producedbut who within the assetmanagement firm should takeresponsibility for ensuring that

this happens? Should it beCompliance, as it is a regula-tory report, or Client Report-ing, as they have the produc-tion skill set? Should it beProduct Strategy, as theylaunch and manage the fundsand share classes to whichKIIDs relate, or thePerformance/Risk team asthey supply essentialdynamic data, or some otherteam?

Then there is the volume andscalability issue. As a KIID isgenerally produced for allUCITS funds, sub funds andshare classes, the typicalasset manager can end upwith a potentially large andunmanageable number ofKIIDs to produce, all within 35business days following yearend plus potentially on anintra-year basis. Trying to fitthat ongoing monitoringrequirement and annual burstof activity into the period endprocess without an impact onresources is a challenge.

The majority of the informa-tion is static and only needsto be updated on an annualbasis. With respect to thedynamic data, the calendaryear performance is a straightforward piece of informationthat is generally available asa by-product of otherreporting processes. TheSynthetic Risk & RewardIndicator (SRRI) is simply the5 year annualised standarddeviation calculation for thehistoric share class returnswhich are then categorised toa scale of 1-7 (7 being thehighest). It is supposed toprovide the potential investorwith an appreciation of therisk associated with theinvestment. Where the historyof the share class does notextend 5 years, then a surro-gate set of data (usually theappropriate benchmark) isused to fill the gap. Therehave been groans from within

the industry as to therelevance of this measure butfor now, it is here to stay.

Starting PointPrior to this project, this assetmanager used an externalparty to draft and produce theKIIDs but not a specialistprovider. They had arrived atthis point because KIIDs werenew and they had adopted ashort term solution to a longterm requirement. Conse-quently, the operating modelwas not as efficient oreconomical as it could havebeen and the delivery wastactical. The resulting costswere high.

SolutionISC analysed the requirementand recommended the best-fitsolution and subsequentlyimplemented this solutiontaking into account theorganisation’s capability tosupport each stage of theKIID value chain (Supply,Collate, Create and Dissemi-nate).

As part of the RFP process, 9suppliers were invited torespond. What was surprisingwas the divergence in price.Some fees were off the scaleand difficult to justify. Inparticular, a number ofproviders charged a very highfee for calculating the SRRIwhich is surprising given thatthe SRRI is the product of asimple standard deviationcalculation. Some suppliersinsisted on an annual servicecharge. Interestingly, a highproportion of suppliersoffered an end-to-endsolution that included transla-tion and distribution services.

Given the client’s infrastruc-ture, organisation, resourceavailability and skill set, the

"KIIDs are anecessary evil!They have to beproduced butwho within theassetmanagementfirm should takeresponsibilityfor ensuringthat thishappens?”

June 2013


most appropriate serviceprovider was selected. Theoperating model that wasimplemented revolved aroundthe use of an internal KIIDCoordinator working with athird party specialist KIIDproduction service provider.The result was a structuredapproach to delivering KIIDswithin a framework that waseconomical and yetminimised the regulatory risk.

Lessons LearnedKIIDs only became a neces-sity in July 2011 and muchhas changed since then. Thesolution that asset managersput in place to meet thechallenge of producing themmay now be out of date;certainly the range of servicesoffered by third parties hasdeveloped. If the assetmanager has a 3 yearcontract with their currentexternal provider, now is agood time to review themarket alternatives. Alterna-tively, if the asset managercurrently employs an in-house solution, there may bescope to improve theprocess, either throughoperating efficiency enhance-ments or by using an externalservice provider.

With the advent of PRIPs(Packaged Retail InvestmentProducts) and AIFMD(Alternative Investment FundManagers Directive) newflavours of investor informa-tion reporting will be required.So, with more KIIDs, or their

“Theoperational

structures ofasset managers

differ; no twoare exactly the

same, despite ahuge overlap in

their serviceoffering. Assuch, what

works for oneasset manager

in terms of KIIDproduction may

not beappropriate to

another.”

June 2013

The Trouble with KIIDs

like on the way, now is thetime to prepare.

The operational structures ofasset managers differ; no twoare exactly the same, despitea huge overlap in theirservice offering. As such,what works for one assetmanager in terms of KIIDproduction may not be appro-priate to another. Supportingthe KIID production processin-house, or out-sourcing allor parts of the process tospecialist providers are alloptions worthy of considera-tion. Significantly, the serviceofferings from most suppliersare now flexible enough tosupport a wide variety ofmodels.

Lastly, it is worth noting thata number of high profileasset managers have optedto gain some positive PR bypicking up the cost of theKIID process rather thanpassing it onto the fund. Inthis situation it could beargued there is an addedincentive to ensure that thecost of producing KIIDs iskept to a minimum.

How ISC Can Help?ISC have a high level ofexperience with KIID

production suppliers andhave recently completedreviews, selectedreplacement suppliers andthen implemented thechange.� Unrivalled knowledge of

how asset managersoperate� An informed understanding

of market best practice� An assessment of the

current process of KIIDproduction� Provision of informed

recommendations toimprove efficiency andreduce cost� Selection of the most

appropriate supplier atcontract renewal� Efficient client-focused

implementation

If you would like further infor-mation on how ISC can helpwith your KIID or otherreporting needs, pleasecontact:

Geoff [email protected]+44-7740 621 531Mark [email protected]

+44-7711 605 495

A summary of our KIIDSservice can be found here,or on the ISC website.

http://www.assetmanagement-om.com/performance-risk/uk/




http://iscltd.co/administrator/files/1371651059_KIIDS%20final.pdf


“Theconclusion ofthe regulatorswas that firmshad notconsideredextending theirBusinessContinuityplans toinclude thepossibility oftheir serviceproviders nolonger beingable to performbusinesscriticalfunctions”

June 2013

ISC’s newest recruit, JulianBaines, has recently finishedin his role as Chair of the IMAWorking Group (Operations)leading to the publication of awhite paper in response to theFinancial Conduct Authority’s(FCA) “Dear CEO” letter onoutsourcing risks.The IMA white paper can bedownloaded from the IMAwebsite.

Background to LetterFollowing the Financial Crisisof Q4 2008 the regulatorsrecognised the reliance manyAsset Managers had on theirservice providers, whereoperations had beenoutsourced. After a number ofthemed visits the conclusionof the regulators was thatfirms had not consideredextending their BusinessContinuity plans to include thepossibility of their serviceproviders no longer being ableto perform business criticalfunctions along with theimpact on their customers.

The responses from the AssetManagers visited did not showthe existence of clear plans tocope with either severeprolonged service disruptiondue to a force majeure event,or the fact that many of theproviders were an integralpart of large banks that couldbe impacted by financialstress, if another Lehman’swas to occur.

The FSA issued a letter toChief Executive Officers of allasset management firms inDecember 2012 stating that

the options open to them inthe event of a severe servicedisruption or the providersparent/owner falling intoadministration were not viablefor continuity of service forclients of Asset Managers. Itrequested firms to considerthe situations and risks forboth events, in order toconsider the compliance ofcontingency plans with theresponsibilities of SYSC 8(High Level Standards,Systems and Controls). Thisregulation is clear thatalthough Asset Managers canoutsource activities the risk ofservice provision still resideswith them. The on-goingoversight of the outsourcingrisks by having sufficient plansin place is the area where theregulators expect the AssetManager to focus with eventsplanned that were planned forearly Q2 2013 to shareopinions and discuss possiblesolutions.

IMA Working GroupWhen the IMA became awareof the “Dear CEO” letter, theIMA acknowledged quickly theeffectiveness of a collectiveresponse from the industryand formed a Working Groupin January 2013 to enablediscussion of the issues, lookfor the best approach and togive feedback to theregulators. A series ofmeetings took place with across section of assetmanagement companies plusthe major eleven serviceproviders who have the lion’sshare of the industry’sbusiness. The WorkingGroups deliberated variousoptions promoting somethoughts on solutions thatwould radically change thestructure of the relationshipsbetween Asset Managers andThird Party Administrators.The meetings held furthersplinter groups to concentrateon factors such as business

continuity planning, scope ofoutsourcing, agreement onnaming of service provisionand transfer timing realexamples.The group met regularly toform clear opinions of whatwas both practical andcommercial in response tothe 2 possible events. Whenthe representatives of theworking group met the FCA,the regulators were pleasedthat he letter had provoked apositive reaction andwelcomed the role of the IMAin producing a collectiveapproach.

The 11 “Good Ideas” that hadbeen established within theworking group werepresented as the options forthe industry to consider inresponse to the “Dear CEO”letter. These ideas rangefrom the asset managerhaving a strong internalknowledge regarding itsoutsourcing arrangements,across both parties havingrobust exit plans to theindustry improving portabilityand standardisation.The Working Group includeda lawyer to apply the legalopinion to the scenarios,passing on experience indealing with these legalchallenges plus previousexperience of setting upoutsourcing arrangements.The legal oversight resultedin the 2 scenarios beingapplied to the regulatorybreaches that would occur if

Response by the IMA: To the “Dear CEO” Letter on Outsourcing Risks


June 2013

asset managers were unableto continue to serve theirclients/customers. Usingthese breaches and risks anumber of mitigations wereconsidered along with thelegal implications leading tothe construction of the “WhitePaper”

Review of Portability ofService ProvidersOne of the early concernsraised by the Working Groupwas the possibility of needingto change providers at shortnotice due to financial stressor administration of any of thebanks involved in thisindustry. The ability tomigrate to another provider,although one of the optionssuggested by the regulatorswas felt to be an 18 month’sto 2 year exercise due to thecomplexity of models’infrastructure.

To substantiate these claimsa number of recent migrationprojects were reviewed forexamples of timeliness andissues encountered. Thesewere included on a no-namesbasis in the White Paper tohighlight this issue as a majorrisk that needs attention tohelp reduce thesetimeframes.The second generation ofoutsourcing is still very newwith very few assetmanagement firms taking onthe task of migration awayfrom their original providersdespite the existing operatingmodel complexity. This isdifferent to the custody modelwhich is now mature enough

to allow large migrations in a3 to 6 month period. It wasfelt by the working group thatthe custody model was thetarget and had evolvedmainly due to adoption of acommon standard for Swiftmessages enabling allproviders to develop theirinterfaces using a standardprotocol.

Although this became theagreed approach to improvethe portability and gain furthersupport from the third partyprovider’s community, thiswould need a huge industryinitiative to make it happen.There are a number ofindustry groups looking atvarious industry initiativessuch as FIX Protocols, LEI’s,Data Standardisation, butthere is no driving forceensuring that these areadopted by the assetmanagement community intheir dealings with serviceproviders. Making thenecessary changes would becostly with no easily visiblereturn on investments.

Making it Real andCommercialOne of the first concerns ofthe working group was thatthe impact of all thesuggested changes wouldprove too costly making theservice provision lessprofitable for providers or toocostly for Asset Managers.Both would likely lead to theslow death of the UKAdministration Industry withparties migrating services tolocations where theseregulations would not apply,

such as Dublin orLuxembourg. The need toprotect the UK Industry sectorwas of great importance inthe promotion of solutionssuch that they can be easilyimplemented, or if costlyallow enough time for them togradually evolve.Keeping it commerciallyrigorous was welcomed bythe Third PartyAdministrators, whorecognise the benefits ofthese changes, but also thatthe scale required needs tobe over a longer period oftime. The impact on serviceproviders has beenrecognised by both groupsand also the benefit ofperforming collectively. Thishas followed in the wake ofthe recent successfulSolvency II Working Groupformed by the IMA involvingboth TPA’s and AssetManagers setting thestandard for joint involvementin providing solutions. Eachprovider has met with theirclient base but also as agroup to ensure the messagegiven back to both assetmanagers and the regulatorsis consistent as this is anindustry challenge with nocompetitive advantage forany provider to gain fromtrying to go alone.

Legal and RegulatoryImpactsThe discussions during theworking group came upagainst 2 major legal andregulatory issues.

Firstly the impact ofCorporate Insolvency Law


“One of thefirst concernsof the workinggroup was thatthe impact ofall thesuggestedchanges wouldprove toocostly makingthe serviceprovision lessprofitable forproviders ortoo costly forassetmanagers.”


June 2013

would likely preclude anypragmatic solutions beingallowed to exist by anyadministrator looking after abank post failure, as it wouldsimply concentrate on whatwas best for the creditors andthe administration clientswould be well down the list ofthose receiving any attention,including any “lights on”provisions or sale of the partof the company.

As has shown with Lehman’sthe process is still on-goingover 4 years later and is likelyto be another 6 years untilresolved by administrators.Obviously a period that wouldbe too long for any impact onservice provision.

Secondly, the recognition thatalthough service providers areregulated at the parent level,the service function areasthemselves are not. Thiswould require a change tomany rules across manyregulations, an exercise theFCA and the other regulatorsare unwilling to perform. Thisexclusion has impacted therecent resolution and recoveryplans provided by Banks tothe regulators as the areaperforming the services werenot required by the regulatorsreview. Many Banks hadincluded the area in their plansas they saw it as a business

critical service, but as this isnot regulated it cannot betaken into account as viewedby the regulator in anyrecovery planning. Thishighlights exactly why AssetManagers need to have theirown sufficient planning andprotection of their customersin place. One hedge fund hasput in place a structure ofshadowing across 2 providerstheir complete operations tomitigate their exposure toeither relationship, but this isnot a model beingencouraged by either theFCA or IMA.

White Paper EvolutionThe White Paper was drawnup by reviewing what wasincluded in current BusinessContinuity Plans in an'average organisation’ andexploring areas that neededexpanding.

Taking into consideration thepossible breaches of theregulations as a result ofeither a severe servicedisruption or financial failure,this led to a table ofrisks/issues that were linkedto various mitigations. Themitigations became the ideasfor good practice which whenpresented to the workinggroup was changed to GoodIdeas in case they becametoo prescriptive as it is not a

single solution appropriateto all firms.It is hoped that the papershows the recognition ofthe risks and suitableactions for the regulators tobe able to satisfythemselves on a standardby which forms shouldoperate. The FCA hashosted 2 meetings for ChiefOperating Officers on 24th

April and 1st May with afurther IMA event beingsupported by the FCA on18th June 2013 for allmembers. These eventsshould hopefully lead to theregulators producingguidance on their preferredapproach and anything elserequired beyond the “GoodIdeas” detailed in the WhitePaper.

If you wish to discuss thismatter in more detail onhow it may impact your firmplease contact either GeoffEdwards or Julian Baines(Chair of IMA WorkingGroup –Operations) oncontact details as below:

Geoff [email protected]+44-7740 621 531Julian [email protected]+44-7867 389 956


The 11 GoodIdeas of theIMA can befound in thewhite paper onthe IMAwebsite.

Recruitment at ISC

Consulting positions both permanent and temporary are available.Please forward your CV to [email protected]


