Oversight –Shadow or Hands Off Approach?

Notwithstanding the regulator’s increasing attention to governance and minimising risk, there doesn’t seem to be an industry accepted view as to what constitutes proper oversight by fund management companies.  In fact, accepted practice can range from a “hands off” distance based approach, to the extreme of shadow record keeping by the manager.

The “hands off” approach might involve the fund management company carrying out spot checks on the third party administrator’s records during periodic visits.  Reasonableness checks may be carried out on daily fund valuations by the manager, without a line by line review of holdings and prices within the valuation.  The manager’s case for this approach might be that there isn’t time for a full review of valuations prior to the release of fund prices.  In any event, the administrator is often obliged to compensate for losses arising from their own errors, so the manager may see themselves as free from financial risk.

The opposite approach is for the asset manager to maintain their own records to shadow those of the administrator.  Whilst the manager may not mirror the entire investor register, they will have a shadow set of investment accounting records and be able to cross check against daily valuations, period end reports etc.

The reality in terms of what the FCA are expecting is likely to be somewhere in the middle of the two approaches.  Proper oversight shouldn’t amount to complete replication of the records, but does require the manager to keep on top of key indicators and maintain reasonableness checking.

If you would like more information on employing a “skilled person” in an oversight role, please call Steve Johnson on 01277 263578 or email steve@acfinancial.co.uk.