02 May 2022
Supporting the FCA’s Custody & Fund Supervision Strategy
On 23 March 2022 the FCA published a letter on the regulator’s custody and funds supervision strategy
The FCA used the letter to both highlight their view that our sector plays a vital role in the UK financial system, and to list the four principal areas of potential harm they perceive as applicable to investors or to market integrity. NatWest Trustee and Depositary Services (NWTDS) welcomes the letter and the regulators continued focus on our industry. This complements our strategy of investing in technology and resources to improve governance in the Asset Management industry. We have made and will continue to make, substantial investment in our people, technology and service proposition. We believe this will enable us to deliver best in class governance to help protect the interests of investors by accelerating the frequency of oversight and delivering value adding insight and data services. Our strategy and approach is aligned to the purpose behind the FCA letter and is consistent with our regular interactions with them
In response to each of the four key areas of concern the letter highlights and the subsequent supervisory priorities the FCA will employ, we wanted to provide our thoughts in respect of how NWTDS has and will continue to address the risks, whilst working with the regulator to deliver the best protections for investors.
Operational resilience, including cyber resilience
As part of the NatWest Group, NWTDS is supported by experts in operational resilience, disaster recovery, business continuity and cyber security. Comprehensive mapping of our services and systems means we are able to serve our clients effectively and mitigate the impact of disruption. Our investment in our cloud based transformation programme will enhance the resilience of the systems that deliver our core services. The security and protections afforded by the technology it’s built upon were notified to the FCA in 2021 and we did not receive any objection to proceed.
Client Assets (CASS)
The protection of client assets and money remains a key focus for the FCA across all regulated entities. The letter makes clear the vital role CASS compliance has in ensuring the integrity of the funds ecosystem. NWTDS is designated as a large CASS firm and receives support from a dedicated team of CASS experts from NatWest Group and are represented as part of the Leadership Team of the business to ensure CASS is appropriately considered in our actions. Our CASS team works with multiple third-party custody providers and has a robust due diligence and oversight programme to ensure the assets for which we are ultimately responsible are suitably protected. Through our transformation programme, CASS oversight is one of the many areas that is being enhanced, capitalising on a digital first, cloud based, data platform and the insights it can provide.
Rob Palfrey, CASS Oversight Manager commented – “Ongoing regulatory focus in the client assets space is anticipated as CASS is vital to maintain trust in the integrity of the UK financial system. Our investment in our transformation programme gives NWTDS the exciting opportunity to treat CASS processes as core components of our technological estate, rather than them being a bolt on to existing systems or delivered manually. The platform has been designed from day one to meet all our core depositary CASS requirements, such as independent books & records”.
The letter highlights concerns the FCA has regarding continued weaknesses they observe in Depositaries oversight and evidence of effective challenge to the Fund Manager. They also specifically highlight the need for depositaries to act honestly, fairly, professionally, independently, and solely in the interest of fund investors.
At NWTDS we strongly agree that robust, independent, oversight from a fund’s depositary is key in protecting investors. We are, and will continue to, invest heavily in market leading cloud based technology delivered through our transformation programme. This will give us enhanced capabilities to meet our current and future core responsibilities but also give us the ability to provide new insights to our clients. The platform will fundamentally change how NWTDS oversees and supports our clients in areas such as investment and borrowing limit and liquidity monitoring that will see us move to a near real time approach. We understand this is unique in the market place and will enable our clients to resolve issues in a more efficient and expeditious manner. For our clients this will flatten the work load, reduce risk, rapidly identify significant portfolio events and ongoing trends. Moreover, the platform will facilitate the kind of holistic judgements that the FCA increasingly expects from depositaries, not least on hitherto challenging areas such as prudent spread of risk.
As well as technology NWTDS is investing in its people to ensure that we attract and retain subject matter experts on the funds industry. This helps our clients, have confidence that we can demonstrate the ability to challenge that the FCA, and increasingly Fund Boards and Independent Non-Exec Directors, expect.
High risk, illiquid and speculative investments
The FCA is rightly concerned that custody and fund service firms may be used to provide an inappropriate veneer of legitimacy to firms who engage in the manufacture and promotion of speculative and illiquid investments. Whilst NWTDS works with high quality, UK regulated, fund managers who offer a wide range of collective investment schemes suitable for varying types of investor, the combination of the strength and depth of our people coupled with our technology enables us to challenge our clients when appropriate. We agree with the regulators aims of ensuring that investors are not misled into buying speculative and illiquid investments, and see our industry as important in promoting high quality funds for investment.
Market and regulatory changes
NWTDS Regulatory Horizon scanning means that our specialists are abreast of, and will provide our clients with, regular insight around upcoming changes. Our Depositary Insights thought leadership series attracts substantial viewers and we remain committed to ensuring proactive dialogue with our clients and the industry as a whole, in order to promote best in class governance opportunities and requirements.
Third Party Administrators
The letter is also directed at third-party administrators who provide services such as fund accounting and transfer agency on behalf of fund managers. The messaging from the FCA is clear that their significant ongoing supervisory engagement in this area includes fund managers’ CASS governance and oversight as well as operational resilience in relation to outsourced activity.
Mark Crathern, Managing Director, Head of NWTDS,
"Our investment and strategic ambitions are wholly aligned to the progression of governance across the Asset Management industry. The Funds industry has not kept pace with the Capital Market protections afforded to Bond and Loan investors and I welcome the FCA once again highlighting their requirements for progress. We at NWTDS are into our third year of substantial investment in a new platform that will enable us to start to enhance insights and protections for investors and we remain committed to the independent approach where we are free from broader operating model distractions and any actual or perceived conflicts of interest."
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