Fund Admin Features

Impact of COLL on fund administration

An assessment of the impact of new fund regulations on fund administration systems and procedures.

Regulatory change has always presented challenges for the administration function and the new FSA collective investment schemes sourcebook (COLL) is no exception.  COLL sets out the rules for UK authorised funds and is mandatory for all funds from February 2007. Until then, existing funds can operate under either the existing rules (CIS) or the new rules (COLL).

COLL impacts all areas of administration, including investor servicing, pricing, valuation and reporting to investors. Fund promoters are launching new funds under COLL and, at some point before February 2007, will need to convert existing funds from CIS to COLL. The administration function, whether outsourced or in-house, needs to create a plan of action that includes analysing the rule changes, deciding what amendments are required to systems and procedures and then implementing the necessary changes within this timetable.

The new rules allow increased flexibility for fund managers to manage their funds including the option to invest in property, gold and non-approved securities, depending on type of scheme. All new authorised funds issued under COLL must be either a UCITS retail scheme,   a non-UCITS retail scheme or a Qualified Investor Scheme (QIS), which has much wider investment and borrowing powers.  Administrators need to be able to distinguish the clients who want to invest in each fund type under the Know Your Customer rules.

COLL opens up the opportunity to use derivatives more widely in retail funds.  The increased use of derivatives challenges the need for a greater degree of automation than in the past, for trading, portfolio valuation, position monitoring and reporting.

QIS funds can invest in precious metals, commodity contracts and derivatives based on commodities and can short-sell securities.  To the extent that these instruments have not been used in the past, new procedures for trade capture, new sources for pricing and new rules for valuation will be needed.

Funds can charge a performance-related management fee.  These have been extensively used in the offshore and hedge fund world, but only now are accepted in the retail funds market.  Whether the fee calculation is supported by an interface to a stand-alone system, or integrated into the main accounting engine, the complexities for daily priced funds are high.

Generally, the new rules allow wider and more flexible Investment and Borrowing powers. For example, depending on scheme type, up to 20% of a scheme can be invested in non-approved securities; up to 20% in unregulated schemes; up to 35% invested in any one other regulated collective investment scheme; up to 10% in gold; and borrowing can be up to 100% of the scheme and no longer just on a temporary basis.  The accounting function needs to cope with measuring and reporting what funds can and can't hold.  These changes will need careful re-setting of monitoring parameters and potentially greater reporting requirements.

The signs are that fund promoters are using the new rules creatively, to build mixed fund types, perhaps mixing fund-of-funds with multi-manager funds. These complex structures need stronger reconciliation and reporting procedures, with a higher degree of automation and processing power for the daily pricing cycle.

Other changes under COLL impact the fund pricing process. Only single pricing, not dual pricing, is proposed for all funds.  As the deadline of 2007 approaches, more funds will switch to single pricing.  Different share classes for OEIC funds have existed since their inception in 1997. Now, different unit classes, other than merely for accumulation of income,  are permitted for authorised unit trusts.  Unit class pricing may not be possible under older accounting systems without significant development.

Managers are expected to give due consideration to Fair Value Pricing if circumstances dictate.  New governance policies, review procedures and documentation will be required to support valuation decisions.

COLL also impacts the process of reporting to investors.  Short Reports are a new document introduced by COLL and their production and issue to all investors is compulsory.  These are meant to provide a concise, readable document for investors and require administrators to gather information from a range of sources.

Overall, the impact of COLL is that fund promoters have more freedom to develop innovative products but this will challenge the administration and accounting functions to respond - both in systems and business procedures. These changes could influence the choice of a fund group of whether to invest in the technology needed or to outsource and avoid the future spend.

Regulatory change can often be seen as a burden on business development. However, in this case, there is competitive advantage to be gained from fund promoters working in tandem with their service provider to develop joint solutions that meet the challenges and opportunities presented by COLL.

This is an edited version of an article which appears in STP magazine March 05

COLL resources

FSA COLL Guide

Consultation paper CP185

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