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Don’t Fear The Depositary – Debunking The Myths

This article was first published in COO Connect on 5th October 2015.

The depositary aspect of the AIFMD was a source of concern before and during implementation. But now the new regime has just finished celebrating its first birthday, Ian Kelly, CEO Augentius, sat down with some of the company’s depositary clients to discover what living with a depositary has really been like for them. The overwhelming feedback is that the function hasn’t been a burden, and can actually provide value.

Ian Kelly Headshot BW-headshot-150x150

Ian Kelly
Chief Executive Officer
+44 207 397 5465

Myth 1: Appointing a depositary is a cumbersome process

Given that the depositary needs to be plugged into the day-to-day running of a fund, there were considerable fears that the very process of appointing a depositary would prove distractingly bureaucratic and drawn-out.

In reality, however, this isn’t necessarily the case. While it depends to some extent on your firm’s ability to embed a new service provider speedily, once a depositary is appointed the process is quick.

The slowest aspect of the initial work comes from securing third party access for the depositary to the fund’s bank accounts so that it can perform its cash monitoring function. But experience has shown that this is a relatively simple and painless task – and in any event it is all managed by the depositary.

Myth 2: Cash monitoring is intrusive

This is the most volumous part of the depositary function in terms of the daily checks that need to be made. Consequently it was one of the main causes of concern for managers pre-implementation, in terms of its potential to get in the way of day-to-day activity.

However the feedback from clients shows that this isn’t the case. Bespoke solutions, using auto-reconciliation processes that tailor these checks around a fund’s existing procedures allow the work to be done in the background, invisible to the manager. This is an important differentiator to look for when selecting a depositary as one-size-fits-all approaches can be intrusive. It is also an argument in favour of appointing a depositary with specific expertise concerning your type of fund or asset class.

Of course, this function means giving the depositary read-only access to your fund accounts. But the more this process can be automated from the start the better, as manual solutions really just do not work.

Myth 3: Asset verification can alienate asset holders and delay deals

This is the most complex of the depositary functions: but that complexity is a challenge for the depositary, not the manager. All the manager has to do is submit the required documents (all fairly straightforward) on completion of a deal, and maybe answer simple follow-up questions in the case of unusual transactions.

There were concerns that this process could involve unwarranted ‘hassling’ of asset holders. But experience has shown that as long as the process is carried out by experienced professionals, this hasn’t been the case. At most, the manager may have to do some initial ‘facilitating’ of contact with asset holders to assuage confusion as to why they’re being approached.

For a while during pre-implementation, it looked as if the Directive would require depositaries to verify information before the closure of a deal. This would have been incredibly disruptive. Thankfully this didn’t come to pass, but it’s worth ensuring your depositary only requests information after deal closure.

Myth 4: The oversight and compliance function is scary

At first glance, the oversight and compliance part of a depositary’s role can make it look like you’re being asked to have a mini-Regulator permanently on your doorstep.

This is not true. Upon appointment the depositary is required to carry out a risk review of the fund. The document list is comprehensive but you’ll have plenty of time to compile it, and the depositary will never request documents you shouldn’t already have! There may also be some on-site diligence, but again, the content will never be unexpected. A good provider will turn the risk review around within a working week.

This process is very unlike a formal audit or investigation. The depositary is on your side, trying to help you, not catch you out. If there are any problem areas, your depositary should immediately discuss these with you so that they can be addressed before the final take on report. Feedback from our clients shows that managers typically welcome the reassurance this process provides, and interestingly many go on to request more ongoing contact with the depositary. Good providers can build ongoing compliance monitoring into processes in way that provides support above and beyond the requirements of the Directive, without additional burden on the manager.

Myth 5: The depositary only adds cost, and for no value

The AIFMD came onto the scene amidst a subdued post-crash environment and intense competition for capital. Given this, it is understandable some managers balked at the prospect of adding yet more cost. What is the return?

Feedback from our clients suggests that the depositary function does add distinct value. It creates an added layer of security, insurance, and credibility. And this doesn’t only benefit the end investor: the latest EY report on the sector confirms the rising importance of operational excellence as a differentiator when investors come to select funds. Investors respond well to clear signals of compliance. At least once a year, the depositary is required to conduct a comprehensive, periodic review of the managers’ procedures and Augentius issues a report which summarises our findings. Most managers have decided to incorporate this “Compliance Statement” into their annual accounts.

Spread across a fund, the cost impact of the depositary will be negligible for individual investors. Nonetheless having your depositary contribute its findings to your annual fund accounts can be a good way of communicating its benefit to your investors, and avoiding it being just an anonymous cost.