Since the start of the new millennium, the requirement for greater transparency across all levels of the investment value chain has come under increased scrutiny and supervision from politicians and regulators alike. The implementation of more intense investor protection legislation has continued to affect the global asset management industry - and the fund distribution process in particular – whereby product manufacturers and distributors are increasingly challenged to comply with numerous local, regional and global, regulatory initiatives.
Junaed Kabir, Global Distribution Executive, International Financial Data Services
Initiated by the US transparency rules; to the introduction in 2010 of Indian Know Your Distributor (KYD) legislation, and now the impending EU MiFID II legislation, the active management of distribution channels by asset managers has become increasingly important as cost pressures rise and business models evolve.
Similar to Know Your Customer (KYC) principles, KYD is making its way into the global markets in an effort to ensure products are distributed in the jurisdictions that have been agreed with the product manufacturer using suitable channels to appropriate investors.
Issues surrounding reputational risk, brand management, and potential litigation resulting from poor processes have meant asset managers are placing greater emphasis on KYD and on understanding the operating model of their appointed distributors.
This is all well and good, but what does all of this global regulatory change and local adaptation mean in practical terms?
Since local distributors are often the principal or sole points of contact with investors, product manufacturers are being forced to evaluate their distributor and sub-distributor networks more closely and on a regular basis in order to assess their compliance culture and practice.
How they undertake this assessment continues to vary widely.
The divergent approaches taken by early adopters have meant the industry has developed a number of initiatives, with varying degrees of consistency, when approaching KYD. Some asset managers / product manufacturers have increased their distributor support teams to cater for the anticipated additional workload in internet searches and physical due diligence visits; others have outsourced some of the activities to specialised service organisations; while others have taken a more traditional approach of engaging an audit firm to screen via site visits.
The creation of a single questionnaire template is widely discussed by industry bodies such as Alfi and the ICI as the holy grail, with the purpose of creating a more efficient method of due diligence for all parties involved. The difficulty, however, lies the in fragmented fund distribution channels across Europe and the Asia-Pacific regions and varying interpretations of global and regional legislation into local law.
Even with all of these good approaches, it would seem at this time, that there are more questions than answers. None more important than the following – are there actually any benefits to the end investor that the politicians and regulators are trying to protect?
Junaed Kabir, Global Distribution Executive
International Financial Data Services
ALFI TA Steering Committee member
ALFI TA & Distribution Forum 2015
Panel discussion: KYD – A game changer in Distribution Operations?