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The future of depositary is digital

17 November 2022

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Depositary services are in high demand and pressure from regulators is growing. Automation will help give investors better protection. Bas Coenen, head of depositary, Western Europe and Cinzia Ereddia, deputy head of depositary tell us more.

The simplest description of a fund depositary’s purpose is “to protect investors”. We fulfil that essential role through a combination of record keeping, cash flow monitoring and due diligence on third parties.

But in Luxembourg– and probably more widely too – the challenges for depositary services are growing.

These essential cogs in the fund administration machine are being asked to do more with less, as demand grows and regulation tightens.

That’s why the future of depositary has to be digital. Specialised software can increase the volume and improve the accuracy of depositary work.

To put it another way, automation lets us protect investors even more.

Regulators want more from depositaries

The profession in Luxembourg faces two challenges.

The first is the sheer demand for services. Private equity, infrastructure and real estate funds have proliferated over the past few years. They all require an independent depositary service to oversee their activities.

That has led to the second – greater scrutiny. As alternative funds draw in more investors and play an ever greater role in the wider economy, they have inevitably attracted more attention from regulators.

Over the past two years, regulators in Luxembourg have increased on-site visits to depositary service providers.

These visits involve deep dives into what the services are doing now, with recommendations for future improvements that go beyond what was – until relatively recently – standard market practice.

Penalties for non-compliance are becoming more common. Fines for depositary providers used to be rare in Luxembourg. Today they are issued with alarming regularity.

A perfect storm for depositaries

In summary, depositaries face a perfect storm of growing demand and increased oversight. On top of it all, they are struggling to recruit the staff they need.

With more work, more visits from the Commission de Surveillance du Secteur Financier (CSSF) and more recommendations to implement, depositary service providers naturally want to grow their headcount. But experienced professionals are scarce and salaries are high.

These problems are exacerbated by the fact that most depositary services still largely rely on manual systems. They may have automated one or two tasks but much remains to be done.

It’s clear that digitisation must be a priority. Regulators are taking rather a piecemeal approach to depositary oversight, with those yet to face an on-site visit largely carrying on as before.

This is risky. Regulators will expect more of everybody sooner rather than later.

The best advice for depositary services is to get ahead of the curve and start optimising their processes before the combined challenges of increased oversight and growing demand forces their hand.

Software is the answer for depositaries

Pressure on depositary services might be intense, but solutions are on hand. In the past few years, developers have designed automations for a wide range of depositary tasks.

For example, one key role is ensuring that net asset values are calculated correctly. The depositary will receive a report from the fund’s independent in-house valuation team or a third-party valuer, and check it against the valuation used in the fund calculation.

This can be a detailed and labour-intensive task – but a good software solution can do it more accurately in a fraction of the time.

In fact, much of a depositary’s time is spent going through documents and reports in fine detail and comparing information from separate sources.

Digital solutions that automate these processes can increase both the volume of work completed and its accuracy.

This isn’t a call to replace people with software. Not everything can be automated and the volume of work means skilled professionals are needed as much as ever.

But it does allow depositary services to meet demand, satisfy increased regulatory scrutiny and fulfil their fundamental role – to better protect investors – despite recruitment pressures.

In Luxembourg, most depositaries understand the need for modernisation and are starting on their digitisation journeys. In two or three years, automation is likely to be the rule rather than the exception.

Why Intertrust Group?

  • Intertrust Group is in advanced talks on implementing a fully automated depositary solution.
  • Intertrust Group is an authorised Alternative Investment Fund Managers Directive (AIFMD) depositary in Luxembourg and across multiple European hubs.
  • Our depositary service has been specifically designed for alternative investment fund managers of illiquid assets to comply with their regulatory obligations.
  • Intertrust Group is a publicly listed company with 70 years’ experience providing world-class trust and corporate services to clients around the world.
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