Reading the LinkedIn article shared by Francois-Kim Huge (Deloitte) titled “2021 is the year of technology transformation for management companies”, I considered why it has not been the year of ManCoTech before now.
The reluctance of ManCos to embrace digital transformation has always struck me as disproportionately high, considering the cost of being caught short and the benefits and savings that can come with digital transformation.
We tend to have increased regulation to protect investors and the system, but never embrace the tools and methods that would increasingly make it easier to control.
With the declaration of OpenLux this week, the CSSF has stated that it has doubled its numbers since 2013 to over 1,000 “qualified agents”. It has announced a “modernization program” since 2018, named CSSF 4.0, with the goals of “effectiveness, transparency, improved interaction with the market, and risk management”.
In Luxembourg, delegate due diligence is nothing new for ManCos, but CSSF Circular 18/698 has crystalized the requirements expected by the regulator.
My understanding is that a ManCo must:
- Have a detailed policy supported by robust procedures;
- Collect and scrutinize data and documents provided by the delegates;
- Provide a risk report to sign off and evidence the process;
- Set follow-up tasks and recurrent/ongoing processes, such as KPIs and compliance checks.
Most ManCos we have engaged have manual disjointed processes to achieve these goals, and find the workload a burden for already overworked compliance and oversight teams.
From our interaction with a large number of management companies in the Luxembourg marketplace, we can see the following:
- Most ManCos currently have implemented a policy and processes to monitor delegates.
- Many have relied on consulting services to develop at least some of these policies and processes.
- Many outsource processes such as data gathering or even initial risk assessment, due to the fear of the burden of the tasks faced.
- Many avoid implementing digital solutions in favor of either relying heavily on key staff or external solutions.
It seems that ManCos avoid the risk of change by relying on key staff or appear to pay third parties to mitigate the risk/effort.
To me, neither of these choices seems a long-term solution, as staff move on at an increasing rate in both the ManCos and consulting companies, and ManCos are being asked to consume less resource for competitiveness.
Digital process automation coupled with digitalization
From discussions with ManCos, we see that the reluctance to embrace digital transformation can be attributed to several factors:
- Lack of budget, or focus of budget elsewhere;
- Lack of focused market solutions;
- The process often spans several departments, which blurs the need;
- And my favorite – too busy shoveling to get petrol for the bulldozer.
While we at FIN|SOFT believe that digital transformation is the answer to reducing the effort, complexity, and visibility of the delegate DD process, we also believe that this can be introduced gradually, broken down by both the delegate role and the tools being used.
Below are the areas where digital transformation can be implemented separately and be a huge benefit in changing processes:
- Centralized data store
Being able to store dynamic data points with extensibility, searchable fields, and audit trail can allow departments and software to share and make use of the data for reporting, and evidence changes to the data over time.
- Document management system
Being able to digitize and save documents with security, searchable fields, and audit trail can allow departments and software to access the documents.
- E-signature usage
Identifying which documents can be signed without a wet signature provides a large resource saving. Anything that is internal can be achieved this way, as can most external agreements.
- Standardized data exchange – REST API
Essential for integrating applications and building any analytical resource. Most data and SaaS services come with easy-to-use API services. Everything from screening services, such as World-Check, to European Commission official exchange rates can be accessed via an API for simplified use in processes.
- Automated questionnaire services
Building your standard DD questionnaires rather than sending Excel sheets or PDFs means that you can automate prefilling, simplifying the process for your delegates and for the DD officer’s validation of the responses. This can be extended to your ongoing processes, such as KPIs.
- Calendars and task follow-up
Centralizing these for teams and departments facilitates visibility throughout the organization.
- Workflow and checklists
Standardize processes and reduce the key-man dependency.
All of these transformations can be integrated into current processes in a gradual, iterative manner.
Onboarding different delegate roles
Implementing different digital tools is one way to increase the chance of success but iteratively implementing the processes for different delegate roles can also provide quick wins.
Choosing a purpose-built product, such as FIN|SOFT Oversight, can provide an efficient, professional solution quickly, and be rolled out over the different delegate roles over time.
The AML/KYC process is somewhat consistent across delegate roles but operational DD and ongoing DD can be very different, considering the different delegate roles.
Taking these roles on a step-by-step basis can be the key to achieving a successful ManCo digital transformation.