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 Good governance and professionalism a “must have” for a successful business

Over the last few years the duties of the investment managers have notably widened, in terms of Governance, AML/KYC requirements, IT security requirements and last not least both sustainability disclosure and client preferences knowledge. Overall, the requirements to obtain the PSF license has substantially increased accordingly and once obtained companies need to assure an on-going monitoring and application of these requirements. In this article we explain how we approach governance within FARAD I.M. and illustrate it with the example of one of our core service: ADEX

  1. Introduction

A PSF is a legal person who has been granted authorization to perform on regular and ongoing basis an activity of the financial sector in accordance with the amended Law of 5 April 1993.

The category of Professionals of the Financial Sector (PSF) is a generic label including a wide variety of legal licenses: from Investment firms (portfolio managers, investment advisers etc.) providing traditional services of the finance sectors to specialized PSFs (registrar agents, domiciliation agents, family offices etc.) to support PSF (IT firms) providing highly technical services.

PSFs are regulated by the Luxembourg authority CSSF and the CSSF regulations and circulars form the core ‘practical’ dispositions with which PSF must comply and they provide guidance in establishing and maintaining the relevant financial or financial sector ancillary activities. CSSF regulations and circulars can apply to all or some PSF.

Concerning investment firms the main CSSF dispositions to be implemented are about KYC and combating money laundering and terrorist financing including obligation to cooperate with authorities, professional secrecy and several organizational requirements.

Within the organizational requirements there are mandatory actions such as establish adequate policies and procedures to comply with the legal obligations, define appropriate rules governing transactions, maintain and apply effective organizational and administrative arrangements and systems.

Investment firms are also called to manage properly the conflict of interests putting in place measures that reduce them to a residual risk.

They need to apply rules of conduct when providing investment services to clients including providing clear and understandable information, monitoring best execution of trading orders and applying an order handling policy, assessing the client knowledge and experience, financial situation, investment objectives, sending regular reporting. On this aspect since 2022 a new obligation has been added: investment firms are called to adequate their analysis and reporting to the sustainability preferences of the clients.

In case an investment firm does not respect the CSSF dispositions clearly can be sanctioned in agreement with its statutory tasks of prudential and conduct supervision by the authority with an administrative penalty. The amount of the penalty will depend on the seriousness of the deficiencies found during an inspection. The administrative penalty can be partially reduced if the entity put in place a reliable remediation plan.

In the most serious cases the administrative penalty can become a criminal sanction that combine a fine with a prison sentence. The ultimate measure is the withdraw of the license. The administrative penalties are public and so they can seriously affect your reputation.

Over the last couple of years several investment firms and credit institutions have been fined by the CSSF for various reasons. This includes, for example, not complying with professional obligations of internal governance, not respecting the AML/KYC duties during on-boarding or monitoring processes, not complying with organizational requirements under MiFID II, for market abuse violations and not comply with reporting of transactions in financial instruments rules, for poor IT governance.

These fines are reported on the CSSF website and the entities may or may not be named and the amount vary. They have been a couple of significant fines over the last 18 months. For example on May 4 and May 17, 2022, an investment firm was fined a total amount of EUR 1,015,000 on the back of an on-site inspection because of some breaches regarding, between other elements internal governance arrangements and product governance and the management of conflicts of interest. On December 21, 2022 a credit institution was fined EUR 1,560,000 for non-compliance with professional AML/CFT obligations. This fine was also imposed on the back of an on-site visit.

According to us, such case show how the governance of a company is important and that mentalities have to evolve or in fact, should have evolved and that the way to do business in Luxembourg is not the same anymore in 2023 than it was maybe 20 or 30 years ago. In this context, we want to emphasize the fact that, within FARAD I.M. we reviewed and enhance our governance and processes over the last couple of years not only to meet the regulatory requirements, but to be already ahead of what future requirements may be. We can always improve our processes, policies and procedures and will do but the key is to be willing to be adaptative to a changing environment.

  1. ADEX: presentation of the service

The advisory service (with third-party advisors) is a specific asset management service that FARAD I.M. provides to its institutional clientele. This particular service allows the team to provide an exceptional high-value service thanks to the professional support of an external consultant, while remaining the main and direct entities accountable for the portfolio management.

Advisory execution (or “ADEX”) aims to manage the overall wealth issues, by integrating the pure asset management activity with consultancy services dedicated to the institutional partners and independent consultants for their own high standing clientele. ADEX open architecture approach allows institutional clients to grant access to their clients to tailor-made solutions obtained by calling for specialized external portfolio management specialists to be involved in the investment process carried out by FARAD I.M.. For these reasons, FARAD I.M.’s top-end service presents a high level of customization qualifying itself as ideal in responding to the specific needs of our institutional partner’s end customers.

The framework for advisory service mandates

The advisory service is ideal for counterparties who do not have the required license to proposed investments and/or investment strategies to their client. We can manage the assets of their client and implement the agreed investment strategy thanks to our CSSF license.

Our wealth management experience with external advisor can be applied to every kind of investment mandates, starting from investment funds (both UCITS and AIF) but covering also life insurance policies and private direct accounts.

ADEX service can be applied to different types of underlying financial instruments (from plain-vanilla liquid investment to alternatives, such as private equity, real estate and hedge funds), always respecting the requirements of each instrument and the specific investment objectives and risk profile of the client.

This service is gaining of importance because the PSF license is more and more difficult to get and the minimal requirements needed to start a new regulated business are getting more and more stringent over time, and finding a professional investment manager is the key to ensure the alignment with the client needs and to build a fruitful and solid business relationship.

How does it work concretely?

The value-added of the advisory service is to leverage the solid experience gained throughout the multi-year experience of the dedicated investment team to determine the best investment vehicle and strategy which suits the needs of the client and matches his investment objective.

Following the definition the right investment strategy by using support of an external advisor, our direct portfolio management with external advisor is carried out in two different phases.

Within the first phase, the contractual one, after the signature of a cooperation agreement between FARAD I.M. and the Advisor, the latter is officially appointed by FARAD I.M. case by case.

The second phase on the other hand, is the operational one, framed by a dedicated operating memorandum among the different parties involved, which defines the initial model portfolio, the frequency of the advisory committee (typically on a quarterly basis) which gathers the macroeconomic analysis of the investment team and the external consultant bottom-up analysis within the specific sectors / investment products, and states the workflow for the advice generation, evaluation and execution, carried out passing through pre-trade checks and ending with the online update of the allocation.

  1. ADEX and governance

In the ADEX service, good governance is necessary for the proper functioning of the service and the achievement of its objectives. The investment manager remains the responsible for the investments made and for this reason he must always maintain an independent position with respect to the advices received. He has to evaluate whether those advices are plausible for the client/portfolio in question, respect the risk profile and the investment policy of the portfolio and then decide if the advices can be executed or not.

There is a substantial risk that the investment manager executes any advice received without making a proper analysis; In FARAD I.M. we have mitigate this risk and reduced to residual creating a Chinese wall between the portfolio management team who applies the advices proposals and middle office team who makes the pre-trade investment compliance checks on the orders and places the orders on the market.

  1. Conclusion

In a challenging and evolving business environment appropriate and solid internal governance is a must have and a basic requirement for investment firms not just for complying with regulator requests but to ensure the survival and continuity of the enterprises.

Having in place policies, procedures and  processes assuring the activity is carry out in a professional, proper, transparent and organized manner means you are driving safely your company through the continuous challenges you meet: you write what you will do, you do it and you have control functions to check that everything was done as planned.  

If you are looking for support in fund management, fund distribution, sustainable investing products or other related services, please contact us: CRM@FARAD-IM. com

Gianluca D’Alessio,

Head of Portfolio Management


Nicoletta Morsut & Gianluca D’Alessio

Conducting Officer & Head of Portfolio Management

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