Alternative fund managers face rising compliance risks and need to invest

• Almost nine in ten (88%) alternative fund managers believe the level of compliance risk facing their organisation will increase over the next two years
• Around two thirds (67%) say their organisation has been subject to risk and compliance fines or sanctions in the last two years
• More investment in technology and systems is urgently needed to combat this, according to Ocorian’s global study

The level of compliance risk facing alternative fund managers is rising and set to increase further over the next two years, according to new research* from Ocorian and Bovill Newgate, a market leader in regulation and compliance services for funds, corporates, capital markets and private clients, and more investment is urgently needed to tackle the issue.

The international study among senior leaders and senior compliance and risk executives at alternative fund manager firms which collectively manage around US$132.25 billion AUM, found that almost nine in ten (88%) believe the level of compliance risk facing their organisation will increase over the next two years. Of these, more than one in ten (11%) think the increase will be dramatic.

This increase in compliance risk comes against a backdrop of under-resourced compliance teams and an already high level of fines. Of those surveyed, two thirds (64%) say their compliance management team is already under-resourced, with over half of these (34%) feeling that they are hugely under-resourced. The number facing fines and sanctions is already high, with 67% of respondents admitting their organisation has already been subject to risk and compliance fines or sanctions over the last two years. A further 9% admit they’ve received an information request or a visit from the regulator in the past two years.

Matthew Hazell, Co-Head of UK Funds, Guernsey & Mauritius at Bovill Newgate, said: “Our survey shows a worrying backdrop of fines, sanctions, and under-resourced compliance teams within alternative fund managers, against which nine in ten of those interviewed believe the level of compliance risk their firms are facing is only set to increase further in the next two years. It’s encouraging that leaders within these firms are recognising these future challenges and know they must act now to remain one step ahead.”

Ocorian’s study reveals the top three areas that alternative fund managers believe need investment over the next 24 months to address the issue are technology (58%), systems to manage processes and procedures (57%) and hiring relevant and knowledgeable personnel (53%).

Matthew added: “Firms must have a thorough understanding of their own compliance and risk needs – and any potential changes to these through growth or organisational change - in order to invest shrewdly in the right systems, processes and people to protect themselves from these future risks.

“We recommend following a three lines of defence approach to protect their businesses – firstly, implement robust procedures, policies and training; secondly, comprehensively monitor these; and finally, review and challenge through independent audit.”

Ocorian’s three lines of defence approach to tackle risk and compliance challenges:
 

• Line one: create clear and robust frontline processes and procedures, supplementing this with both online and face to face training programmes for staff.
• Line two: build and empower a comprehensive compliance oversight function which monitors and assesses the processes and procedures, as well as advising and supporting staff and senior managers to comply with the firm's obligations.
• Line three: seek review and challenge of the firms AML framework via annual independent audits.

Assisting with a broad range of compliance services Ocorian’s multi-jurisdictional expert regulatory and compliance consultancy service, Bovill Newgate, delivers pragmatic and flexible solutions to help clients meet often complex, evolving and increasing regulatory obligations. Bovill Newgate’s expert team of 120-plus industry professionals and former regulators covers six jurisdictions – the UK, Channel Islands, Singapore, Hong Kong, Mauritius and the Americas - and is supported by its innovative, proprietary technology platform, the Gateway, to ensure best-in-class client service and operational efficiency.

The team is led by industry experts and ex regulators and helps clients with the submission of regulatory authorisation applications, provision of Money Laundering Reporting Officers (MLROs), the implementation of compliance frameworks and governance structures, as well as regulatory and compliance training.

*Ocorian commissioned independent research company PureProfile to conduct a global study (across the US, UK, Germany, Brazil, Singapore, Hong Kong, UAE, Turkey, Quatar, Saudi Arabia and Mauritius) of 101 senior executives, regulation and compliance executives working at alternative fund manager firms (including private equity, venture capital, real estate, infrastructure, private debt, renewables and hedge funds) during January 2024.