CP138: Management and director oversight of fund distributors and sub-distributors

10 November, 2021

Under CP138, funds and mancos should consider several key factors when developing a framework to manage outsourcing arrangements.

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The importance of managing delegation or outsourcing risk has never been more pertinent given the increased complexity and reliance on outsourcing activities. Under CP138, funds and mancos should consider several key factors when developing a framework to manage outsourcing arrangements including: intra-group arrangements, contractual arrangements and service level agreements, ongoing monitoring, disaster recovery and business continuity management, and the provision of outsourcing information to the CBI. Most importantly, CP138's scope addresses Outsourcing Service Providers (OSPs) considered critical or important, such as fund distributors and focuses on the initial and ongoing due diligence aspects of these outsourcing arrangements.

Performing due-diligence procedures for a fund's distributor and sub-distributors, where relevant, continues to be a challenging and onerous process for funds and fund management companies because of the volume and complexity of these arrangements. There can be many intermediaries between an investor and an investment manager such as fund platforms and regional distributors and distribution channels can be complex and, at times, not transparent.

CP138 sets out the CBI's expectation that appropriate due diligence reviews should be conducted of all prospective OSPs including intra-group providers before entering into any arrangements. Due diligence procedures clearly outlined in CP138 include, among many, the periodic review of the financial health of key OSPs, review of key contracts before expiry, and analysis of sub-outsourcing arrangements (chain outsourcing) to determine if any additional look-through due-diligence procedures are needed on sub-service providers. CP138 makes clear that the CBI expects more oversight on chain outsourcing relationships to the depth and extent dictated by risk appetite.

For chain outsourcing, primary fund distributors need to perform rigorous due diligence on their sub-delegates and maintain evidence thereof. Rigour is not clearly defined but should include, for example, that appropriate due diligence is performed on an ongoing basis on each sub-provider and that proof of these due-diligence activities are available upon request (including any on-site visits as appropriate). This can be challenging and should be allowed for within any contractual arrangement with the sub-provider.

Technology has helped firms deal with due diligence procedures to follow-up on requests and report to key decision-makers and the board. Following up on unanswered questionnaires can be time consuming and, depending on risk appetite and the criticality assessment of outsourcing arrangements, may lead to further data collection. To alleviate the workload, some funds and mancos have outsourced this due diligence function to providers who specialise on these matters such as PwC.

What boards are mainly responsible for under CP138

  • Reviewing and approving management's risk assessment;
  • defining an entity specific outsourcing strategy aligned with the entity's board-approved, outsourcing policy (including due diligence performed, conflicts of interests, exit strategy, etc.);
  • reviewing and approving the methodology and assessment for determining criticality or importance of the fund's distributors and sub-distributors;
  • ensuring that appropriate skills and knowledge are maintained to effectively oversee outsourcing arrangements from inception to conclusion;
  • ensuring an up to date outsourcing register is maintained and reported to the CBI as required;
  • notifying the CBI of planned critical or important outsourcing arrangements in a timely manner i.e., in advance of such arrangements being entered; and
  • ensuring that assessment of the outsourcing arrangements form part of the firm's third line of defense (via internal audit or third-party assurance, if necessary).

Top 10 questions boards should ask the DP of distribution and management in relation to distribution oversight

(Questions 6-10 relate specifically to CP138).

  1. Who will be responsible for distribution in each of the jurisdictions where the investment fund will be marketed and do paying agents or local representatives need to be appointed?
  2. Have local marketing rules and tax laws been assessed and do the distributors and sub-distributors have a robust system of controls in place to ensure that marketing of the investment fund complies with these requirements?
  3. What controls are in place to keep marketing materials consistent with the fund's investment policy?
  4. In relation to ESG products, are distributors and local representatives putting together their own marketing materials and have these been reviewed and compared to the fund's prospectus (i.e., what controls are in place to ensure that distributors are not selling Article 8 funds as Article 9 funds and that they are selling to the right target market?)
  5. Are the fund's marketing materials (and information included on the distributor's website) up to date, and do they comply with local regulations?
  6. Is there an inventory of all SLAs with distributors and do these contracts specify activities that are prohibited from being outsourced, and include termination rights, KPIs to assess performance of OSPs, etc?
  7. Does the fund distributor have a signed contract with each sub-distributor it engages, and do they perform appropriate due diligence on an ongoing basis on each sub-distributor?
  8. Where is the core IT infrastructure for distribution content hosted (for intra-group, third-party distributors, and sub-distributors)?
  9. Do the fund distributor and any sub-distributor have proper business continuity processes?
  10. Are the controls in place to monitor outsourcing arrangements subject to the periodic review of internal audit or a third-party auditor?

Due diligence, for all your delegates

With ever-increasing regulatory pressure for due diligence on delegates across the fund value chain, a robust process to monitor, control and track compliance, is of paramount importance. Facilitated through a web-based platform, our Due Diligence experts can assess the compliance of your delegates—distributors, investment managers, transfer agents, fund administrators and custodians—with their ongoing regulatory obligations. We will rate and identify all gap areas against local rules and regulations, and provide prompt and independent advice to remediate any issues identified.

Contact us

Ken Owens

Partner, PwC Ireland (Republic of)

Tel: +353 (0) 86 817 1368

Marcos Zubrzycki

Senior Manager, PwC Ireland (Republic of)

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