Luxembourg's IFMs keep up with tech

Investment fund managers (IFM) around the globe are looking to better the data management use of front- and middle-offices, given there is now a general understanding that portfolio performance can be better assessed by machine and data analysis. Some changes include providing clients with web-based front-end tools to access data, helping model what-if scenarios, as well as allowing faster reporting.

Technology upgrading is a high priority for the private equity community across the board, according to Vistra's Private Equity Fund Governance Report 2019, which considers the viewpoint of LPs, GPs and intermediaries across Asia, Europe and the US. The report will be made public in early 2020 and the firm has shared with Unquote some of its findings: 71% of the respondents say they require greater information flows, and 85% believe technology increases effectiveness in work. Although artificial intelligence and cybersecurity could pose major risks, 67% of the professionals surveyed believe new technologies could provide the solution to cyberattacks, while 55% consider outsourcing to a third party as a way to mitigate risk.

For IFMs, the technological shift is strongly pushed by their clients: better monitoring of allocations paves the way for clarity and transparency for LPs. Jervis Smith, country managing director of Vistra Luxembourg, says: "Margins in asset management have traditionally been higher; therefore, the industry experienced less cost pressure compared with banks or insurance companies. Their main focus was the performance of funds rather than making their own operations more efficient. However, in the past few years fund administrators around the globe have taken a different position: performance might be transitory, so services need to be constantly good and cost-efficient."

Security upgrade
Against this backdrop, the regulatory framework around cloud computing and fund admins in Luxembourg has seen some changes in recent years. Allen & Overy Luxembourg's counsel Catherine Di Lorenzo says: "Luxembourg, the second most important geography for fund domiciling after the US, is a highly regulated and secure geography – it is not surprising that some regulatory measures around cloud outsourcing have been put in place." IFMs are now required to comply with regulation affecting cloud outsourcing agreements, which include obligations around governance, notification and consent of clients, management of outsourcing risks, business continuity, systems security, and right of audit for the IFM and the financial sector supervisory authority.

A first circular was published in 2018 by Commission de Surveillance du Secteur Financier (CSSF). However, it was lacking clarity on aspects such as how the cloud circular applies to IFMs and the timing of the application of the requirements. Di Lorenzo says an updated version of the cloud circular, the Circular 19/714, was issued in March this year, which significantly reduces and clarifies the obligations of IFMs. "The revised circular notably clarifies how existing cloud outsourcings should be brought in compliance with the requirements of the revised cloud circular," she says. The latter also provides for a grace period for the implementation of compliance steps by IFMs and removes the need for CSSF approval for material outsourcings that existed when the circular entered into force.

A consequence of the tech shift is that IMFs are looking to recruit employees with backgrounds in hard sciences, comfortable with coding and able to support the technological shift. This new need is a burden on the already complex issue of talent acquisition in the region. On the other hand, the use of technology will make work faster and more efficient, entailing less reliance on manual labour in the long run. Says Di Lorenzo: "Given that outsourcing agreements will be more common, we expect staff to be able to manage such services from abroad. Having said this, some specialised staff in Luxembourg will be required to ensure the monitoring of such outsourcings."

Despite an initial lack of clarify from CSSF, and some recruitment issues likely to arise, Luxembourg and its myriad local IFMs are certainly working hard to keep up with the times and remain a prominent geography for domiciling funds.

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• Topics
• Advisory
• Benelux
• Luxembourg
• Fund administration