Non-compliance with AIFMD risk management obligations could lead to (very) large fines for asset managers
As we pointed out last summer in back to the future , but its worth repeating, for the first time in the history of asset management, risk management is on a par with portfolio management as a result of AIFMD. From a control perspective, the Risk Manager no longer reports to the Chief Investment Officer. This is a significant change and our strong view is that this has not yet been taken seriously by the investment management community.
We have no doubt large fines are coming andor enforcement actions against AIFMs that are not conforming with the risk obligations per the AIFMD legislation. It is probable that the NCA’s will begin with themed inspections, starting with the larger institutions as they figure out where the gold standard should be. They will then expect smaller asset managers to meet these minimum standards (which, let’s face it, have already been codified in AIFMD).
There are a few things an AIFM can do to ensure compliance with the risk obligations of AIFMD. Firstly ensure your risk function is free from any conflicts of interest. Set up an effective Chinese wall between the front office and the risk function. Also ensure your risk function covers market risk, liquidity risk, counterparty risk and credit risk at a minimum. Regulatory reporting under AIFMD (Annex IV) is burdensome so it is vital that your regulatory reporting solution is comprehensive and robust. Approximately 60-70% of the required data is risk related so risk providers such as RiskSystem (we have an Annex IV solution with an inbuilt XML generator) are a good place to start.
If you think the cost of compliance is expensive try the cost of non-compliance.