Choosing Substance over Sanctions

Revel Wood, FundRock CEO talks about the new Sanctions Regime and the increasing need for substance and effective control. The implementation of the UCITS V directive in March last year was a sharp wake-up call for many industry players to up their game and take the consequences of non-compliance more seriously than ever before.Like its predecessors (I to IV), UCITS V serves to enhance investor protection, drive greater transparency, strengthen governance and pinpoint conflicts. This time, with harmonization as a top priority, we are faced with a new list of breaches, minimum list of sanctioning criteria and catalogue of sanctions, establishment of whistleblowing mechanisms and required reporting to ESMA. In light of geopolitical pressure and rising protectionism, ESMA has taken significant steps towards driving centralized control stipulating, in its latest Opinion published on 31 May, that “National Competent Authorities (NCA) should be able to verify the objective reasons for relocation”,” special attention should be granted to avoid letter-box entities in the EU27” and “NCAs should ensure that substance requirements are met.” Harmonization of sanctions across Europe is an inevitable measure taken by regulators given the monumental gaps in levels of leniency across different jurisdictions: until this new directive, fines varied from lightest touch jurisdictions of around just a million euros to highest fines of a couple of hundred million. UCITS IV came into being in 2009 in the wake of the Madoff and Stanford scandal which set alarm bells ringing in regulators’ ears. With the more recent scandals of fund companies using the Swedish Premium Pension System (PPM) due to lack of transparency and fees for savers, the directive has certainly not been in vain. The consequences of non-compliance cannot be taken lightly. Non-compliant firms are risking significant financial exposure, up to 10% of the firm’s global revenue in addition to the reputational damage from publication of the relevant sanction. The sanctions apply to all parties across the industry: individuals such as independent directors or individual employees can be subject to up to EUR 5 million in pecuniary sanctions and a ban from carrying out their activity of up to five years. A public statement on top of that could potentially convert a temporary ban into something regrettably more permanent. This heightened enforcement means one thing for Management Companies/AIFM, independent directors and investment companies – the need for greater substance and effective control. The stakes are high in terms of the reputational risk and the substantial price to pay for late filing, non-compliance with reporting requirements and conflict of interest requirements, or failure to report shareholder structure. Simply put, it’s just not worth it, if you are in the business for the long term. FundRock is dedicated to protecting investors, clients and boards through strong substance, controls, knowledge and global connectivity. With offices in key fund jurisdictions (Luxembourg, Ireland, UK and Singapore), we have always been well-equipped to embrace new regulations. Adherence to the principles of codes of conduct, investment in a state-of-the-art RegTech tool, and a solid governance structure all contribute to maintaining the clean track record that underpins our long heritage of strong commitment to investor protection. Recent focus indicates how serious this is. Local authorities have accelerated their own substance by increasing staff numbers to meet the administrative demands. AIFMD will certainly revise its sanctions regime with AIFMD II in the near future; and enhanced employee protection and effective whistle-blowing mechanisms are in place to proactively encourage the reporting of breaches. It is fundamental not to lose sight of the broader picture. In the wake of this era of sanctions and fines, it seems the regulators are just getting started. It is therefore worth choosing a reliable, experienced Management Company/AIFM that places emphasis on devising long-term strategies. Peace of mind is worth its weight in gold. Better safe than sanctioned, we can assure you, and you’ll thank yourself when UCITS VI appears on the horizon. Revel Wood CEO, FundRock Management Company S.A.