21 August 2019

The undervalued compliance risk of fund distribution

When MiFID II became EU law, a consumer protection requirement was introduced, requiring asset managers to perform distribution oversight and to ensure their funds are being sold to the correct target market audience. In practice a four-points checklist needs to be covered at all times:

  • Know who your distributors are
  • Perform a risk-based assessment of every distributor
  • Send and receive completed due diligence questionnaires
  • Receive Target Market suitability back from each distributor

Fund distribution chains are complex and opaque. There can be many intermediaries between an investor and an investment manager: fund platforms, regional distributors, country distributes, local brand etc. Performing effective oversight below the first level of direct distributors is a challenge, yet it isn’t a process that can be outsourced. Fund manufacturers often manage their oversight manually or in spreadsheets, which suggests that many might struggle to provide regulators with the confidence that their oversight is well established.

Even riskier due diligence

Because asset managers are responsible for the activities performed by their distributors, a thorough initial and ongoing due diligence of all distributors is essential. Yet due diligence is poorly documented. The feedback received from distributors is scarce, because some only communicate intermittently or when they observe a negative target market event. Asset managers must respond to mis-selling incidents when they occur and patchy communication adds delays which can lead to regulatory fines.

Whilst the distribution process is surrounded by risks of non-compliance and fines, ultimately an inefficient process has a cost as it impacts a company’s bottom line, and it wastes time that could be spent elsewhere on higher value activities.

The platform solution comes to life in this context. With Kneip you can ensure that your products are sold through the correct distribution channel to the right end-investors and we provide effective automated due diligence of fund distributors, by reducing by 90% the time spent on due diligence and gaining a complete view of fund distributors’ network. Keeping compliant with MiFID II isn’t just less risky, it also allows you to access superior richer analytics to help you grow your distribution network. Contact us today.

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