The Financial Conduct Authority published a Report on the use of Risk Modelling and other Portfolio Management Tools in the Asset Management Sector, based on interviews from Senior Managers at 10 Asset Management Firms of varying sizes and Operating Models.
The FCA found varied approaches to the use of Portfolio Management Tools:
- A Single-Provider approach, where all Tools are provided in an Integrated Package by the same Provider
- A Multi-Provider approach, where a Suite of Tools from various Providers are used
- An In-house approach, where the Firm builds is own Custom Solution(s).
The Report notes the advantages and the disadvantages associated with these three general approaches, including trade-offs between Costs, Flexibility, and the Concentration of Risk in a Single Provider.
The Report also discusses different approaches across six Thematic Areas:
- Vendor Management: The FCA notes that Firms typically took three approaches to managing Vendors, including:
- A Centralised Function to oversee all Providers
- A Decentralised approach, where each Business Line takes oversight of relevant Vendors, and
- A hybrid,where both business managers and a central function take responsibility
The FCA found that Firms have struggled to address issues arising from increasing Cyber Risks and Regulatory Changes, in addition to failing to align Vendor Management Programmes with levels of Risk.
- Model Governance: Firms took varied approaches to oversee the Risk/Investment Models, including the use of Frameworks to assess a sample of Risk Models and the Validation of Models on an Individual Basis. The FCA notes difficulties surrounding Model Governance, partly due to lack of technical expertise on the part of the First and Second ‘Lines of Defence’
- Managing Change: Firms are reluctant to change Front-Office Technologies because the process is Complex, Lengthy, and Costly. The FCA notes that Technological Change is often inhibited by Data Migration Issues and an inability to test new Tools effectively
- Resilience and Recovery: Firms are not adequately preparing for outages of Service Providers, despite their Critical Operational Importance. The ‘FCA’ found weaknesses in the Frequency, Timing, and Storage of Critical Data Back-ups
- Testing of Software: Firms took varied approaches to testing Software Upgrades, including over-reliance on Testing by Software Providers, Phased Roll-outs of Software Updates, and close engagement with Providers to fully scrutinise their Testing Arrangements. The FCA notes tension between the need to quickly implement changes and the desire to Test fully
- Customer Expectations: Firms are not adequately managing Customer Expectations surrounding the use of Risk Modelling Tools, especially concerning instances in which Portfolio Managers overrule Model Outputs
Firms in the Asset Management Sector should review and assess the Report with input from Risk / Compliance, Legal, Operations, Information Technology,Front Office / Portfolio Managers, Business Continuity, Change Management and Finance Teams, ensuring that Senior Management / Executive Teams, Board Members, Risk /Compliance and Audit Committees are appraised and maintain oversight.
Firms should consider revisions to existing Processes, Policies and Procedures accordingly with revisions in accordance with Internal Governance Procedures, ensuring their implementation, oversight, and contingency arrangements in respect of these Tools enable them to comply with FCA’s expectations set out in the Systems and Control Handbook (‘SYSC’) and elsewhere. This includes ensuring that they can continue to function and meet Regulatory Obligations in the event of an unforeseen interruption to Risk and other Portfolio Management Tools.
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Please Note: This publication is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying the information contained in this publication to specific issues or transactions.
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