Effective Oversight and Controls Amidst Rising Adoption of External Fund Administrators in Asia Pacific

The investment management industry has increasingly outsourced middle and back, and, to a certain extent, front office functions in Asia-Pacific. This trend emerged due to the heightened pressure on investment managers to deliver returns in a highly competitive market, with clients becoming increasingly price sensitive. These factors have led to shrinking profit margins, prompting investment managers to seek ways to improve operational efficiency, reduce costs, and enhance performance. Outsourcing provides a means to achieve these goals while managing risk and maintaining a competitive edge. At present, the industry generally hires external Fund Administrators (FAs) for various fund administration services to improve operational efficiency and reduce operating costs, and improve credibility as well.

As more processes are outsourced, robust oversight and controls become even more critical to ensure service quality, accuracy, and timeliness. Furthermore, tightening regulatory requirements intensifies complexity, requiring investment managers to prioritise regulatory compliance. As such, investment managers are fortifying oversight and control over external FAs while navigating the complexity and intricacy of their operating environment. Investment managers who are able to build a strong and collaborative relationship with their external FAs can focus on their core service offerings while continuing to deliver value to their clients.

In this paper, we will explore several trends around fortifying external FA oversight. First and foremost, the importance of building a robust oversight and control framework. Investment managers should ensure this framework is harmonised across geographical locations while addressing local specificities and requirements. In addition, investment managers are re-evaluating the nature of their existing oversight model. While most adopt a more policing and ad-hoc approach, transitioning to a business partnership enables better collaboration and unlocks untapped business value. Above all, regulatory requirements and expectations might be the most obscure topic, leading to potential reputation and business consequences if not adequately addressed. Successfully navigating the plethora of regulations would require joint ownership from investment managers and external FAs.

As part of market insights, we will share our survey findings of seven medium to highly mature investment managers in Asia-Pacific. The survey covers three pillars, including:

• The external FAs oversight model, including the performance review process, due diligence process and the typical key performance indicators (KPIs) used to assess the performance;
• Common controls adopted for pricing and valuation process, as well as typical controls for NAV monitoring; and
• Approach on overseeing reconciliation and break resolution, covering roles and responsibilities and frequency.

In addition, the report also explore the use of data and technology solutions to reduce manual activities.

The findings suggest that, based on a comprehensive supervisory framework and ongoing controls, investment managers and external FAs should establish open channels of communication and involve the external FAs team in the day-to-day operations. In the meanwhile, both parties need to work together to address regulatory changes, and external FAs in particular should proactively communicate the potential impact of regulations and required changes so as to drive more effective synergies, greater scalability and higher transparency. In addition, investment managers should consider using technology solutions with external FAs to optimize operations and address pain points, such as specialized enterprise solutions, data management, robotic process automation and workflow tools, which can help improve process efficiencies, reduce operational costs and significantly mitigate operational risks. In order to maintain competitive, investment managers shall also adapt to the changing regulatory and client expectations, so that they are more likely to win in the Asia-Pacific region.