Asset managers need sharper focus on risk management and transfer as risk landscape rapidly evolves

13 November 2018

Asset management firms need to carry out rapid and comprehensive reviews of their risk management systems and insurance policies to ensure that they are covered for new rules such as the UK’s planned SCR requirements and the EU’s GDPR data protection regulation.

Paul Towler, heads JLT’s fast-growing Financial Institutions (FI) practice, warns asset managers that there is a real risk that firms and their individual directors and officers may find themselves in reputational and financial hot water if they are relying on old risk management systems and insurance policies to cover themselves under the new regulatory and operating environment.

“The risk environment is changing fast for asset managers and they need to ensure that both firms and their directors and officers are properly protected. Outsourcing of key functions is not the simple answer it may appear to be. We strongly advise firms to use an expert adviser with the skills, data and analytical skills needed to properly assess their risk and reporting requirements and ensure that their policies are fit for purpose, not least in emerging risk areas such as cyber,” said Mr Towler.

JLT advises five core actions needed to ensure that a firm’s risk management and transfer strategies are fit for purpose in the new global environment. These are:

  • Ensure you are fully compliant with existing national and international rules and regulations and ready for the next generation;
  • Make sure that you are properly covered and do not assume that existing policies taken out under a different risk environment are up to the job;
  • Use the latest data and analytics to properly assess your exposure, work out your risk appetite and what risk you are prepared to carry and what you need to transfer;
  • Test your policies using expert claims advisers to ensure that when the inevitable occurs they respond as intended; and,
  • Take a global approach to your risk and insurance management strategy to ensure that you are fully compliant on a worldwide basis and maximise your insurance spend.

There is a real possibility that existing insurance policies are no longer relevant given the introduction of a range of new rules and regulations that impose new risk management and reporting requirements on firms.

“Asset managers tend to be lean operations that do not have dedicated risk and insurance experts in-house and there is a real danger that, given the rapidly changing regulatory and business environment there are shortfalls in the way risk is being managed and reported and that existing insurance policies are no longer relevant. This could potentially lead to claims against individual directors and officers as well as the firm itself in future and so we strongly advise firms to take expert advice sooner rather than later,” added Mr Towler, whose FI practice at JLT currently advises some 360 asset management firms with $2.7 trillion in assets under management.

Evolving Risk Landscape

Regulation is probably the number one concern facing asset managers. They along with all involved in the financial services sector in Europe, face an ever-changing risk landscape. The looming arrival Brexit further complicates the picture for asset managers based in London.

All asset managers that operate within the European Union now have to comply with The Alternative Investment Fund Managers Directive (AIFMD) that introduced an entirely new risk-based reporting regime and capital requirements for the professional services risk carried by managers.

The EU’s General Data Protection Regulation that came into force in May of this year demands a more structured approach to data security of all businesses across Europe and introduces new risks. Violators of the GDPR may be fined up to €20 million or up to 4% of the annual worldwide turnover of the preceding financial year in case of an enterprise, whichever is greater.

Meanwhile, the UK Financial Conduct Authority (FCA) is introducing its Senior Managers Regime (SMR) and the Competition Review.

SMR will put greater emphasis on governance, risk management and individual liability, while the Competition Review will "further challenge operational efficiency and transparency, putting greater demands on asset managers' data and reporting capabilities, and their bottom line" commented Lofts Gill Lofts, EY's UK head of wealth and asset management in a recent note.

Mr Towler pointed out that JLT regularly finds that asset managers are just renewing old insurance policies that have not been adapted to these new circumstances and resultant risks which mean that the coverage is often simply not fit for purpose in the new environment.

Other big risks that asset managers currently face along with this regulatory uncertainty are planning for Brexit and the wider challenges that come with the rapidly changing business model as asset managers embrace robotic and Big Data.

Asset managers need to work hard and smart to make sure they embrace the opportunities offered by these trends as well as manage and mitigate the risks in a structured manner.

For further information, please contact Paul Towler, Head of Financial Institutions on +44 (0)20 7558 3327.