Reference case

Risk management, compliance, and sustainable investing in the asset management industry

29 June 2023
Key Takeaways
  • The importance of strong collaboration between Risk Management and Compliance
  • Implementation of an efficient internal control environment
  • Significant impact of ESG regulation on Risk Management and Compliance

An Asset Management company with around four billion euros in assets under management sought a temporary replacement for their departing risk officer. Following their operating model of outsourcing processes to industry experts, they approached TriFinance Financial Institutions for assistance. Daan Rens, Project Consultant at TriFinance Financial Institutions, worked for over 18 months in the company on various Risk & Compliance domains. Since the ESG regulation has a huge impact on risk management and compliance, he has also been involved in the company’s ESG process.

Operating model

The company's operating model is driven by outsourcing several processes to third parties with longstanding expertise and a reputation in the asset management industry. This operating model allows the company to focus on asset allocation and its core activities, including Risk Management and Compliance. The Asset Management company ensures effective oversight over the outsourced activities.

The first part of the assignment was mainly related to the Risk Management function with a focus on monitoring, analyzing, and reporting on risk exposure and the performance of the funds. The validation of the Net Asset Value calculation and the investment compliance controls were also part of the daily activities. Financial Risk Management relates to all risk factors that might negatively impact the performance of the funds under management. These risks are particularly important to monitor and report on since fund management is the company's core business.

Financial risk management versus nonfinancial risk management

Both financial and nonfinancial risk processes were part of the assignment. Financial risk is the main risk factor relative to the funds under management as opposed to nonfinancial risk, which is the prevalent risk factor at the level of the Management company.

Daan was responsible for monitoring financial risks such as market risk, concentration risk, credit risk, and liquidity risks, and for consolidating them in a monthly Risk & Performance dashboard and an extended Quarterly Risk Report. The latter also included portfolio breakdowns, comparison with previous reporting dates and benchmarks, and a wide range of stress tests. The risk reports covered various aspects of financial risk using Bloomberg and other information systems.

As to nonfinancial risk management, Daan was responsible for monitoring and reporting the risk profiles, such as business continuity, brand & sustainability, information security and cyber, human resources, and fraud risk. He was also actively involved in the permanent update of several parts of the internal control documentation relative to the Internal control plan, the Internal Control Evaluation Report, the input in the GRC- tool, the Risk Register with all processes, the Business Impact Analysis, and the Internal Capital Adequacy Assessment process documentation.

ESG-regulation and standards are among the fundamental risk management and compliance aspects to take into account.

Daan Rens, Project Consultant, TriFinance

ESG and investment compliance

ESG-regulation and standards are among the fundamental risk management and compliance aspects to take into account. This relates to regulatory requirements, investment restrictions disclosed in the prospectus of the funds, and internal guidelines, and is a critical element in portfolio management. Breaches must be duly documented regarding the nature of the breach, the causes, the internal control identification process, and the remediation actions. This process requires a deep understanding of the multiple investment restrictions and the dynamics of financial markets, and potential distortions in valuations between continents and countries.

Sustainable Investing

Sustainable investing is one of the most critical challenges in the asset management industry. Sustainable investing refers to the process of taking due account of environmental, social and governance considerations when making investment decisions in the financial sector, leading to increased longer-term investments into sustainable economic activities and projects. Daan was enthusiastic about being involved in the ESG process, including monitoring ESG-investment restrictions, understanding the requirements for compliance with the Febelfin ‘Towards Sustainability label’, analyzing issuers' controversy reports and drafting the ESG Risk report.

Sustainable investing is one of the most critical challenges in the asset management industry.

Daan Rens, Project Consultant TriFinance

Transition to compliance

Thanks to the experience gained by working on several Risk Management aspects, Daan successfully transitioned to the role of compliance consultant during the last part of his assignment.

His main activities were related, among others, to:

  • Compliance monitoring in fields such as official fund documentation, outsourcing, conflict of interest, and AML.
  • Supporting the Compliance Officer in reporting to supervisory authorities and governance bodies at the level of the company and the parent
  • Preparing compliance-related committees and meetings
  • Assisting with drafting documentation and updating policies and procedures
  • Completing the outsourcing register

Stringent regulation

Belgian Asset management companies are subject to stringent regulation and FSMA supervision. Daan experienced this firsthand, both in the Risk Officer and compliance consultant roles. Daan had the opportunity to work closely with one of the Executive Directors in charge of Risk Management and Compliance. Seeing from nearby how the CRO managed meetings and Oversight Committees, delegated assignments, steered, and mentored staff members, was valuable for Daan to further develop his soft skills.

In conclusion

Daan's dual roles as a temporary risk officer and compliance consultant allowed him to develop a deep understanding of the company's governance, ESG processes, and stakeholder interactions, enabling him to grow as a consultant on a personal and professional level.

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