With a focus on the rapidly evolving regulatory landscape in the alternative assets space, Directors Rory Blazeby and Richard Hansford highlight the challenges this poses Chief Financial Officers (CFOs) as they try to scale and grow their business.

Part one: Technology in fund administration

Since the global financial crisis in 2008, the alternative asset management space has undergone a seismic shift in both the intensity and frequency of regulatory change. In efforts to prevent systemic risk to financial ecosystems, regulators have increased their focus on required levels of transparency, introduced additional product features and reporting and sought further protection for investors. Although designed to strengthen the integrity of the funds industry, the pace of change over the last five years has created further operational challenges for CFOs, adding to technology (see part one), the increasing influence of the LP and the struggle to attract and retain key talent.

An evolving regulatory landscape

The highly anticipated AIFMD II (implementation deadline 2 August 2021), the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standards (CRS) are just a few of the significant regulatory developments to which GPs must adapt. Business models have had to be modified and new processes implemented to ensure compliance. For the CFO, this has increased operational cost bases while calls from LPs to reduce overall fund costs have also intensified.

Regulators are also focussing on specific areas of concern within asset management firms such as corporate governance, culture and conduct. The FCA published a discussion paper last year on transforming culture in financial services to address these exact issues. As a result, CFOs of alternative assets firms will need to consider how the evolving regulatory landscape will impact operations and commercial costs.

The changing face of alternatives

Recent regulatory challenges facing alternative assets CFOs include:

  • Substance - All core fund jurisdictions (onshore and offshore) are increasingly adopting more stringent economic substance requirements in order to improve the transparency of entity activities and their tax obligations. Fund managers must now evaluate and demonstrate that entities are actually carrying out relevant activities in each entity in their fund structure to support the revenue flows captured.

    There is a common trend amongst tax authorities to challenge the rationale and objectives of the different entities in a fund structure. For example, in a recent Danish beneficial ownership case that went to the Court of Justice of the European Union, local tax authorities scrutinised the principal objectives of setting up holding companies and seeking justification as to whether or not there was a genuine rationale for each entity, other than to take advantage of relevant jurisdictional tax benefits. This has also been an area of interest for the EU, whose 'blacklist' seeks to name and shame countries which support tax evasion by multinationals and wealthy individuals.
  • Liquidity - There are further 'liquidity stress-tests' on the horizon for EU fund managers. In September 2019, the European Securities and Markets Authority (ESMA) published guidelines outlining new, quarterly liquidity stress testing requirements from 30 September 2020. ESMA also recommends depositaries verify that the AIFM has put in place documented procedures for regular testing, placing further emphasis on the strategy and policies that are required to be in place to ensure stability.


    For private asset firms, there will be the need to ensure scenario testing on the portfolio to ensure investments can be exited for an adequate price and within a timeframe in adherence to fund documentation, potential distribution expectations and/or before fund termination.
  • Senior Managers and Certification Regime (SMCR) - In a move to strengthen individual accountability and financial market integrity in the UK, the SMCR replaced the Financial Conduct Authority (FCA) Approved Person Regime for all FCA authorised firms, including alternative investment fund managers. Implemented on 9 December 2019, FCA authorised firms need to ensure they are compliant with the SMCR and employees are familiar with rules and responsibilities applicable to their individual roles.

  • ESG - Although not yet a regulated area, more investors are requiring fund managers to adopt an ESG policy, show how they measure ESG and as a minimum, demonstrate a proactive attitude towards socially responsible investing. The Principles for Responsible Investing recently announced further engagement in the U.S. with congress and the SEC to advance a comprehensive set of policy solutions for a sustainable financial system. Fund managers and CFOs will have to ensure they are ready for the inevitable regulatory interest in ESG.

  • GDPR - Following its implementation in 2018, CFOs must now ensure their teams adhere to rules set out in the EU's General Data Protection Regulation (GDPR). Although fund managers will need to embrace technological developments to manage their data, they should take stock of the associated risks involved in holding client data and whether or not they need to restrict cross border flows.

Relieving the burden

CFOs need to consider whether they have the adequate resources to efficiently deal with the compliance challenge of evolving fund regulation. Many managers have found the answer in outsourcing to an external fund administrator who generally have greater resources to monitor the regulatory landscape and create scalable solutions that can be rolled out across their client base, helping to alleviate the burden and mitigate the risk of this ever-changing environment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.