Oversight under the microscope
30 April 2013
When a beneficial owner employs an asset manager and a separate agent lender, the asset manager sometimes takes a share of the fees for oversight of the lending programme.
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When a beneficial owner employs an asset manager and a separate agent lender, the asset manager sometimes takes a share of the fees for oversight of the lending programme. Some asset managers take this role seriously and implement appropriate checks and balances on the lending programme, assuming a level of responsibility for the actions of the agent lender, which seems reasonable. Other times, the asset manager takes a fee for essentially receiving the reports from the agent lender and incorporating them into a bigger management information pack, assuming no liability. Whether this is reasonable seems less obvious.
Of course there are also a lot of asset managers that fall between these two descriptions.
This practice of taking a fee for overseeing a third-party activity is coming under increasing scrutiny as regulators consider fees and charges more broadly and seek to ensure investors are treated fairly. Some regulators believe that securities lending enhances performance so the asset managers will be re-imbursed through the normal application of asset management fees, which are based on the overall value and performance of the portfolio. However as a discretionary business with small performance returns this may not be sufficient incentive—although there is an argument around an asset manager’s fiduciary responsibility to maximise returns, that might suggest it would be remiss to ignore the opportunity on this basis.
The European Íø±¬³Ô¹Ï and Markets Authority UCITS guidelines published in February caused a stir with a lack of clarity around the guideline concerning securities lending fees, which, when its chair Stephen Majjoor clarified in a speech, seemed to be broadly suggesting this practice may not be appropriate (although does not explicitly forbid it).
With regulatory compliance becoming increasingly complex and a greater focus on understanding the activities of service providers, the oversight role becomes even more critical and the roles and responsibilities around this need to be clearly defined and documented. Someone needs to be considering the risks of the activity, the appropriate framework and adherence with the beneficial owner’s requirements, so who better than the asset manager who manages the other strategies of a portfolio? Íø±¬³Ô¹Ï lending has moved away from defining a set of parameters and then sitting back and waiting for the monthly cheque, and recognising it as a legitimate investment strategy, it needs the same level of robust consideration and review as any other strategy.
The key will be in who has the responsibility of decision making and who has the liability of monitoring compliance with the risk appetite and parameters of the fund in a proactive manner.
Of course there are also a lot of asset managers that fall between these two descriptions.
This practice of taking a fee for overseeing a third-party activity is coming under increasing scrutiny as regulators consider fees and charges more broadly and seek to ensure investors are treated fairly. Some regulators believe that securities lending enhances performance so the asset managers will be re-imbursed through the normal application of asset management fees, which are based on the overall value and performance of the portfolio. However as a discretionary business with small performance returns this may not be sufficient incentive—although there is an argument around an asset manager’s fiduciary responsibility to maximise returns, that might suggest it would be remiss to ignore the opportunity on this basis.
The European Íø±¬³Ô¹Ï and Markets Authority UCITS guidelines published in February caused a stir with a lack of clarity around the guideline concerning securities lending fees, which, when its chair Stephen Majjoor clarified in a speech, seemed to be broadly suggesting this practice may not be appropriate (although does not explicitly forbid it).
With regulatory compliance becoming increasingly complex and a greater focus on understanding the activities of service providers, the oversight role becomes even more critical and the roles and responsibilities around this need to be clearly defined and documented. Someone needs to be considering the risks of the activity, the appropriate framework and adherence with the beneficial owner’s requirements, so who better than the asset manager who manages the other strategies of a portfolio? Íø±¬³Ô¹Ï lending has moved away from defining a set of parameters and then sitting back and waiting for the monthly cheque, and recognising it as a legitimate investment strategy, it needs the same level of robust consideration and review as any other strategy.
The key will be in who has the responsibility of decision making and who has the liability of monitoring compliance with the risk appetite and parameters of the fund in a proactive manner.
NO FEE, NO RISK
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