Sanne on navigating new regulatory waters

This article was sponsored by Sanne. It appeared in the Fund Services special report alongside the September 2019 issue of PERE.

Since the global financial crisis (GFC), jurisdictions all over the world have been adding legislation intended to avoid a repeat. For real estate investment managers, this means an added burden on their back and middle office functions and a wider role for fund administrators. Simon Vardon, director, product development – real estate at SANNE, a UK-listed FTSE 250 fund administration company with 19 offices worldwide, talks to PERE’s Mark Cooper about the evolving role of the fund administrator.

What was the traditional role of the fund administrator in real estate and how has it changed in recent years?

Traditionally, the role has always been a fairly basic back office one and the core tasks have been fund accounting and transfer agency services. It is fair to say that the landscape has evolved fairly significantly since the financial crisis, which precipitated a lot of change in the industry. Fund managers are now focusing much more on regulation and compliance for their structures alongside those traditional tasks for the fund administrator. More recently, a lot of the reporting requirements are being digitalized, a trend that we see increasing going forward. Fund managers are going to be depending more on their fund administrators for managing and processing more data than they have in the past.

What are the factors driving updated and increased regulation of real estate funds, and how can fund administrators help managers here?

We have seen a wave of new regulation, primarily aimed at investor protection and regulating parts of the industry which were previously unregulated. We now have the Alternative Investment Fund Managers Directive (AIFMD), an EU regulation that sets standards for marketing and capital raising, remuneration policies, risk monitoring and reporting and overall accountability. In the US, Dodd-Frank introduced a wide range of reforms to the financial system.

The Organisation for Economic Co-operation and Development (OECD) framework on Base Erosion and Profits Shifting (BEPS) seeks to put an end to tax avoidance strategies that exploit gaps and mismatches in tax rules. It introduced 15 measures to tackle tax avoidance and improve the coherence of international tax rules. Themes of transparency, fairness and accountability run through the various actions that BEPS introduced and fund administrators are needed to help navigate the new requirements and assist managers with compliance.

For example, BEPS Action Four is driving new rules around interest deductibility, introducing an EBITDA basis for interest deductions. Prior to this, for real estate – so long as lending terms were commercial and at arm’s length – typically all interest payable on inter-group loans could be deducted. When this BEPS Action is enacted into local tax legislation, it may alter quite significantly the tax liabilities for various structures. As an administrator, we found that SANNE is well placed to help managers in running scenarios and modeling the impact of this.

Managers may well have dealt with such things in-house in the past, but now are seeing value in asking the fund administrator to assist in these kinds of areas, not least because an administrator is likely to have seen similar scenarios with different funds in the same jurisdiction.

QHow much variation is there in regulations around the world? What are the particular challenges for global managers and their fund administrators that run cross-border funds investing in multiple jurisdictions and tax regimes?

One question we are asked a lot is about our jurisdictional reach and expertise. Typically, managers want one fund administrator to service as much of the fund structure as possible. For real estate, that would include going down to the asset-level special purpose vehicles, which could be in a range of different jurisdictions, as well as the fund itself. Local expertise is key and managers typically want to understand how the fund administrator will deliver an effective and joined-up service while meeting local compliance needs.

Even though we have seen a lot of new legislation and regulation that aims to harmonize standards, perhaps a little bit perversely there is also a lot of local variation in the implementation by different jurisdictions. This might include different deadlines, reporting formats and local guidance nuances. We find managers want to rely on the expertise of the fund administrator to help navigate those local variations.

The jurisdictional reach question is driving a lot of activity in our sector. Many fund administrators are looking to open offices in new jurisdictions to provide solutions in the jurisdictions where managers need them to be. Most fund administrators are looking to increase their international footprint. This is being driven by the demands of the managers that would like to have a fund administrator which can cover all bases, coupled with the increasing number of locations where investments are being targeted by managers.

It seems the direction of travel is toward more and more onerous legislation? Is the burden of regulation putting managers off funds?

It is probably sensible to assume that there will be increasing regulation going forward. However, I do not think increasing regulation is necessarily putting off real estate fund managers from seeking to launch funds – there is still a weight of capital from investors to deploy. However, the burden of regulation can be a barrier to entry for smaller or new fund managers. Managers targeting a relatively small fund still encounter a fairly fixed initial level of expense around diligence and compliance. Alongside collective investment schemes, what we do see in the real estate space is a good number of joint venture arrangements, which will be subject to far less regulation.

Issues relating to data and data security are also driving regulation. How is this developing and what do managers need to be aware of?

In general, we are seeing much more diligence and more questions being asked of fund administrators around data security and business continuity plans. The ‘request for proposal’ document is getting a lot longer. Managers are asking for more detail and a lot of that detail is around data and data security. In the EU, the General Data Protection Regulation (GDPR), which came into force in May 2018, is driving a lot of this. The potential penalties that GDPR introduced can be rather eye-watering, as they are based on a percentage of turnover. For example, British Airways is in line for a £183 million ($228 million; €204 million) fine, equivalent to 1.5 percent of its 2017 turnover, for a data breach.

GDPR and similar laws are a good example of legislation which, while not aimed specifically at the fund management industry, does have a direct impact. We have found that often the administrator can provide an effective line into the regulators to seek clarifications and confirmations on new regulation. That was definitely our experience with GDPR where we clarified the expectations of the regulators in relation to the fund space and for administered entities.

How is the relationship between fund administrators and managers evolving? What is the relationship dynamic? 

There is an increasing trend toward working as a partnership. Managers that provide a line of sight on their future focus and activity will typically see the most value added by their fund administrator partner. It allows the fund administrator to be less reactive. Increasingly, structuring decisions or operational decisions are not completely concluded when a manager reaches out to a fund administrator, because they want to see if there is useful input from the fund administrator that can be brought to the table at that stage. Managers are looking for a longer-term partner. They are looking for a fund administrator that they would be comfortable using for subsequent funds and really get to know them well. We often find the dynamic extends to understanding the ownership profile of the fund administrator and considerations like whether the ownership profile complements long-term investment in technology and systems.

To what extent are all the above factors forcing fund administrators to up their game and what will the role of the fund administrator look like in the future?

The fund administrator space is increasingly competitive, and while we see some firms seeking to secure mandates with aggressive pricing, I believe more managers want to have meaningful conversations with fund administrators about an important list of other topics. We see fund manager diligence and focus on the operational environment of the administrator being fairly continuous now and not just a one-time event at the time of appointment. New technology and new regulation continually add to the tasks asked of fund administrators, but the core need for accurate, timely and secure reporting in a useful format remains.

There is no single ‘biggest challenge’ for fund administrators; the biggest challenge is everything. A successful fund administrator cannot be strong in some areas and weak in others. There is little benefit in having offices in 25 locations around the world but not having a great infrastructure and a recognized fund administration system in place with good controls. Likewise, having a best-in-class compliance solution but only in one or two locations will not deliver the solution that many managers are seeking. Fund administrators must provide robust solutions that can meet the future needs of managers on all bases.

Simon Varden joined SANNE in 2013 and is director, product development – real estate.

Time to step up to tech

Technology such as AI and its implementation in real estate is also impacting the role of the fund administrator, says SANNE’s Simon Vardon

“It really was not that long ago that we were still working with paper documents. There has been a fairly rapid change with a lot more digitalization of various processes and information. So, technology is a key area of focus for managers and they want to understand what fund administrators are doing in the technology space.

There are principally two main areas where there can be a real positive technology impact: efficiency and communication. Fund administrators are looking all the time at where automation can be used for elements of the fund administration process, because it can reduce errors, reduce response times and also reduce costs. There is typically an upfront investment required before the benefits of automation can be attained and it also requires underlying data to be complete, accurate and typically in a fairly standardized format for the benefits to be fully realized.

I think there is plenty of scope for automation to be part of improvements in various fund processes. Fund administrators taking the initiative are nurturing new types of expertise within their organizations, such as client service technology teams and technology and product specialists.”