Deloitte and CIFD Institute launch white paper on risk-based oversight framework

Deloitte and the Certified Investment Fund Director (CIFD) Institute are pleased to launch a white paper presenting a framework on investment fund governance. The Risk-based Oversight Framework provides a practical methodology that takes account of the unique characteristics of an investment fund, and puts investor protection at its core.

The framework is designed to assist investment fund boards and others charged with the governance of funds in their role of identifying, measuring, mitigating and continuously monitoring risks that can damage the interests of fund investors. It has been developed in response to international demands for further enhancements to the governance of investment funds, and in recognition of the fact that investment funds require a different governance solution than organisations within other sectors of the financial services industry.

Sean Smith, Partner, Risk Advisory, Deloitte Ireland commented: “We are pleased to launch this framework with the CIFD Institute and so support and encourage best practice risk governance in the investment fund industry. There are fundamental differences between investment funds and ordinary corporations, and these differences have important implications for the governance of investment funds – and require a unique governance framework. Investment fund governance in this context moves beyond mere regulatory compliance towards this Risk-Based Oversight Framework that puts the protection of investors at its core.”

Risk-based oversight framework event

Unique characteristics of investment funds include the fact that they are fund promoter products, and that investment funds typically outsource the core portfolio and related investment management activities to the investment manager, and the operational and administrative functions to entities other than the fund promoter. Therefore, the conditions for effective investment fund governance should be explored in the context of the set of relationships within the investment fund governance framework, including the fund promoter, and the role that each of the key parties must play in practice.

Dr Margaret Cullen, CEO of the CIFD Institute commented: “The CIFD Institute was established to bring the unique characteristics and challenges of investment fund governance to the front of the governance agenda and to encourage a common, global approach to, and discourse on, investment fund governance with investor protection at the core. The Risk-based Oversight Framework presented in this paper is the cornerstone of the CIFD Institute’s Certified Investment Fund Director Programme. The CIFD Institute is delighted to join with Deloitte offering the Risk-based Oversight Framework to the wider asset management community through this paper.”

The Risk-based Oversight Framework outlines a five step process:

• Step 1: Understanding the fund DNA – how the fund will actually operate.
• Step 2: Risk profiling the fund – identifying the full spectrum of risks attached to the fund, from strategic, environmental, political and reputational risk, and beyond, and allocating ownership and accountability for each risk.
• Step 3: Establishing a governance framework - the output from the risk profiling is the raw material around which the investment fund board’s governance framework is established. This step involves comparing the top down analysis from the board with the bottom up analysis of the each service provider to ensure:

1. There is complete alignment across all parties to the fund as to the nature of risks, ownership of and accountability for these risks and related controls and that this is reflected in contractual agreements.
2. That the operating policies of each of the service providers reflects the DNA of the fund, its respective risk profile, the ownership/accountability for each risk and are agreed by the investment fund board.
3. That the escalation and reporting procedures of the service providers for the particular fund ties into the aligned risk profile of the fund and related risk measurements agreed with the board. It is this management information that will drive the board oversight process for each fund.
4. That all service level agreements are accurate and up to date, reflecting the above. It will be possible to quickly identify gaps in risk management/internal controls which can be allocated to an appropriate service provider through contract or SLA.

The result is a governance framework encompassing operating policies bespoke to the fund, escalation and reporting procedures bespoke to the fund, accurate contractual arrangements and SLAs, and compliance with regulations and legal documentation.

• Step 4: Implement and report - ongoing oversight by the investment fund board.
• Step 5: Reflect, review and revise - investment fund governance is an iterative process and boards should make certain that their governance framework keeps apace with regulatory, operational and product development.

For full details on the Risk-Based Oversight Framework for Investment Funds, please visit www.deloitte.com/ie.