The CSSF has spent the last decade ramping up reporting requirements on fund management companies. In response, the fund industry has invested heavily in automation and now most reports are generated automatically.
If only this was true!
The reality is that outsourcing has emerged as the solution to the problem and most reports are still produced manually. And when deadlines can’t be missed, overtime is a common recourse. Quite an aberration in a country with the highest labour costs in the EU.
The rush to outsource reporting has not made things any cheaper but it has allowed the industry to keep up with the constant stream of new reporting requirements. Specialised service providers have access to expertise, data and headcount to produce reports at scale and on time.
With a relentless downward pressure on fees generated by funds, you would assume that the industry would be focused on cost cutting to improve margins. Actually, we are seeing that most fund companies are reluctant to invest in their back office.
It’s all about budget and incentives.
Marketing passport
One of the sole reasons to establish a presence in Luxembourg is to obtain a marketing passport. There are not many other reasons. It’s the cost of doing business. This matters when budgets are being allocated by a head office to its entity based in Luxembourg.
Additionally, the entity based in Luxembourg is staffed by compliance and risk professionals who are by nature risk averse and not entrepreneurial. They are rewarded for maintaining the marketing licence and for avoiding scrutiny from the regulator. No bonus for cost savings.
You would assume, incorrectly, that the service providers producing these reports have invested heavily in automation. That rarely happens in companies that bill by the hour. Instead, they also focus on investing in new services rather than reducing costs to their customers.
No incentives for cost savings
Outsourcing has allowed the industry to keep pace with seemingly never-ending reporting requirements. However, this is an expensive solution to the problem. There is also little to no incentive for local staff to produce cost savings.
Fortunately, there are a growing number of independent, third party fund administrators entering the market who can’t afford to be inefficient. They are aggressively searching for ways to automate their processes and have a great chance of succeeding.
If they are successful, the rest of the industry will be forced to follow.
Gregory Kennedy is a columnist for Investment Officer Luxembourg. His columns appear every Wednesday. He also works as business development manager at Finsoft Luxembourg.
