Alternative fund managers are losing investment mandates due to compliance issues and internal conflict

New research* from Ocorian and Newgate Compliance, market leaders in regulation and compliance services for funds, corporates, capital markets and private clients shows alternative fund managers are losing investment mandates or clients because of compliance issues.

It also reveals there has been an increased level of internal conflict between the fund management team and compliance and risk team during the last two years which shows no sign of slowing – instead it’s only expected to rise over the next three years.

81% alternative fund managers have lost investment mandates or clients due to compliance issues

The international study with senior leaders and senior compliance and risk executives at alternative fund manager firms which collectively manage around US$132.25 billion AUM, found 81% think issues with their organisation’s compliance has resulted in losing investment mandates or clients over the past three years.

There are signs the trend is getting worse. All senior executives surveyed worry that as fund managers are becoming increasingly subject to global compliance regulations, this will increase the risk of their organisation failing in their compliance tasks. Of these, 70% are very concerned about this.

92% expect level of compliance breaches to increase over the next 24 months

These failings are highly likely to translate into compliance breaches. Of those surveyed, more than nine in ten (92%) expect the level of compliance breaches and risk profile of their organisation to increase over the next 24 months with 24% predicting a dramatic increase.

Increase in level of conflict between the fund management team and the compliance and risk team

Ocorian’s survey reveals another concerning factor that 90% of alternative fund managers report that there has been an increase in the level of conflict between the fund management team and the compliance and risk team over the last two years – and this is only set to increase. More than nine in ten (92%) expect this level of conflict to increase further still over the next three years.

Aron Brown, Head of Regulatory & Compliance at Ocorian, said: “Compliance and risk teams and the expertise, insights and rigour they provide are front and centre to the bottom-line success of every fund manager. They hold a heavy weight of responsibility, and our research shows that failure to deliver can ultimately lead to lost investment.

“But compliance and risk teams must have the right investment and support in order to be able to do this – particularly when facing the challenges of an increasingly regulated operating environment. This could take many different forms, from investing in people and training, technology and systems, or third-party specialist providers who can provide a broad range of compliance services that are bespoke to individual needs.

“This conflict emphasises how important the three lines of defence are to a business and how the FCA’s emphasis on them being separate and cohesive is key – when they aren’t this level of conflict arises.

Ocorian and Newgate’s approach to the three lines of defence:

1. Line one is the policies and procedures employees follow that create a compliant, risk-aware business, including training in those areas – for instance what to do if an employee receives a gift.
2. Line two is the compliance officer or team that provides oversight. They make sure the procedures and policies set down in line one are fit for purpose. They also monitor adherence and amend policies to reflect changes to regulations.
3. Line three is an independent audit. Independent specialists systematically review the company’s policies, procedures, and oversight functions to make sure they are working properly and to identify gaps. The reviewer often pays particular attention to the segregation of roles within the company to make sure they are appropriately defined.

Assisting with a broad range of compliance services Ocorian’s subsidiary compliance consultancy service, Newgate Compliance, delivers pragmatic and flexible solutions to help clients meet often complex, evolving and increasing regulatory obligations. The team led by industry experts and ex regulators 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 for employees.

*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.