Fund Managers: Why Circular 18/698 Might Surprise You

The CSSF's new circular, 18/698, was released one month ago. Although it will require a bit of work to implement, its aims are pure: to create a level playing field for UCITS ManCos and AIFMs, expanding on the existing principle-based approach but with a more prescriptive touch. The circular was written with practical findings on ManCo effectiveness in mind, taken from inspections and older CSSF reports.

In an industry that is anticipating bigger volumes of business (new funds) due to Brexit and other macroeconomic changes, the circular, with its ambition to harmonise the field, comes at a good time.

My team and I have been watching this regulatory landscape evolve in the funds sector for years, (and I myself have a fair bit of hands-on experience as the former head of a third-party AIFM in Luxembourg), and we're intrigued by this new circular. In this blog post we have compiled three insights about it that may not have been completely obvious from the text itself.

This is your last chance to lock in your digital transformation.

Nobody is arguing that digital technology is seeping through every sector and industry, transforming business models, processes, and companies themselves. It is also a hackneyed comment that it's taking longer in financial services, and particularly asset management, than in other areas.

But this circular drives home that now even regulators are expecting data flows to function in ways fairly alien to the norms of ten years ago. Part of the circular's effort to harmonise the industry means that it requires systematic and large-scale flows of information, including systematic documentation and audit trails. In other words, data must be collected, processed, treated, documented, and reported in fast, transparent, reliable ways. Old technologies just won't cut it for this.

This circular isn't actually about substance. It's about operating models.

This new piece of regulation isn't just about substance. It targets the broader subject of the operational effectiveness of ManCos by touching on AML, prescriptive substance requirements, reporting provisions, key function organisation, delegate oversight, and more. It's about upheaving the ManCo's structure and capabilities, so it must be approached from a holistic perspective.

To that end, it's a...

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