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Outsourcing regulation challenges US firms

29 May 2014

40% of asset managers say their current operations are unprepared for future regulation of outsourcing oversight

Read more: Asset management outsourcing oversight

Regulation and automation of outsourcing by asset management firms is set to increase as the practice becomes mainstream.

However, a new survey by Milestone Group shows that most North American firms, including institutional asset managers, wealth managers and pension advisors, were struggling to adapt their business to expected requirements. Some 40% of respondents felt their current operation was unprepared to meet regulatory changes and any required increase in automation.

"The industry’s sensitivity to market events, combined with global pressures resulting from increased regulation in developed markets, would suggest that the Securities and Exchange Commission (SEC) will become less tolerant on this subject and that change is inevitable," the report said.

As regulation increases, automation is required to combat slower reaction times which would otherwise translate into increased operational risk. While best practice in operational oversight is still being debated, there is consensus that automation of the oversight infrastructure is clearly needed.

Larger firms tend to have more oversight of outsourcing than smaller firms because the former have more resources. The survey’s finding support this by indicating a direct correlation between the size of a firm and the level of operational oversight currently being performed.

Over half (61%) of firms were already anticipating the changes. They said they would not wait for the new regulations to arrive before strengthening oversight of outsourcing.

All firms surveyed were in agreement that the outsourcing market would continue to grow in the next three to five years. They viewed protection of reputation and the interests of their investors as their highest priority in regards to responding to the challenges.

Recent market events, including several publicly reported US net-asset-value (NAV) pricing errors and the UK market’s response to the Financial Conduct Authority (FCA) thematic review, has increased scrutiny of operational oversight in the global investment management industry.

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