Can a Fund Management Company Outsource Any of Its Functions? If So, What Are the Requirements?

Introduction to Can a Fund Management Company Outsource

Because of outsourcing, FMCs are able to boost efficiency, gain practical expertise and spend less budget. MAS in Singapore allows Fund Management Companies—Licensed, Registered and Venture Capital Fund Managers—to use third-party service providers for some tasks. But, it must happen in a setting where regulations adequately limit the chance of problems and interest of investors. Understanding MAS outsourcing requirements for fund managers in Singapore helps ensure these practices remain compliant and secure.

This article reviews the functions that can be sent to third parties, the rules imposed by MAS which functions must stay within FMCs and the best practices for outsourcing.

Understanding Outsourcing in the Context of Fund Management

When a fund management company outsources, it asks an outside service company, domestic or foreign, to take care of various functions instead of handling them internally.

Commonly outsourced functions include:

• The activities of accounting and fund administration are part of the back office.
• Basically, the middle-office includes functions related to risk and applying compliance regulations
• Help from the front office team such as research and IT infrastructure
• Getting new clients onboard and carrying out Know Your Customer (KYC) checks
• Data security and services accessed through the cloud

Yet, banks are only allowed to outsource certain main responsibilities such as those subject to tight regulation.

MAS Regulatory Framework Governing Outsourcing

The MAS summarizes what it expects from banks in key documents, of which the main ones are:

• Outsourcing Guidelines (republished in July 2021)
• Notice on Risk Management Practices for Outsourcing by Financial Institutions (MAS Notice 3001)
• Securities and Futures Act (SFA) and its associated license rules

They point out that clear rules, good risk management and sound governance should be included in all outsourcing deals. MAS permits outsourcing, as long as the licensed FMC is held responsible for its results and for proper compliance. This also means firms must adhere to outsourcing compliance obligations under MAS guidelines to protect investor interests and uphold regulatory standards.

Key Functions That Can Be Outsourced

1. Operational and Support Functions

Frequently, FMCs delegate support tasks aside from their important areas to outside parties.

• Fund accounting and valuation are both important topics.
• Services for custodians and trustees
• Trading and the clearing of trades
• Services in the areas of pay and human resource management
• All aspects of IT infrastructure, especially cloud data storage

These tasks are important, but they are not regulatory or managerial roles which makes them fair game for outsourcing when risks are well controlled.

2. Compliance and Risk Monitoring (with Limits)

It is up to the FMC to design the compliance and risk framework, but some managerial and monitoring duties can be given to a third party.

• From time to time, agencies check compliance.
• Companies need to document and report what happens.
• Screening transactions with AML/CFT requirements under s supervised approach

In spite of this, the ultimate responsibility for following regulations belongs to both the Compliance Officer and the Board of Directors.

3. IT and Cybersecurity Services

Because handling financial technology has gotten more complex, many FMCs choose to outsource IT management, looking after their data in cloud environments, cyber defense and identity checks. MAS only allows it if:

• The safety of data is guaranteed.
• Regulations in MAS Technology Risk Management Guidelines are observed by providers.
• Businesses have an extensive response and recovery plan.

Functions That Cannot Be Outsourced

Although outsourcing may make management more efficient, MAS still takes charge of its principle responsibilities. They must be managed by companies themselves.

1. Investment Decision-Making

MAS has responsibilities for its licensed representatives which are:

• Portfolio construction
• Asset allocation
• Actual application of investment strategies

While FMCs can consult outside experts, decisions about what to invest in must be taken by fund managers with a CMS license from the SFA.

2. Overall Risk and Compliance Framework Design

Outsourcing monitoring is acceptable, but the company itself must create, check and accept policies for compliance, AML/CFT and operational risk. Key leaders need to be responsible and answerable.

3. Client Relationship Management and Fiduciary Duties

FMCs need to stay responsible for deciding who can be a client, managing disclosures to investors and ensuring that their advice is in the investor’s best interests. Although such external parties can aid, the company must first allow and watch over them when they are involved in making major client decisions.

MAS Requirements for Outsourcing

The FMC must take care to use a structured process when it decides to outsource, as suggested by MAS.

1. Due Diligence on Service Providers

FMCs should check every provider carefully before starting to work with them. This includes:

• Looking into how financially firm the provider is and how well they run their operations
• Looking at what they have accomplished in the past
• Analyzing the possibility of offshore vendors violating legal rules
• Assessing the company’s ability to protect data

FMCs must pick dependable and trustworthy partners when carrying out essential functions, according to MAS.

2. Formal Written Agreement

An official contract needs to dictate the outsourcing agreement, as it should clearly include:

• What services are included?
• Outlining everyone’s job
• Service-level agreements are known as…
• Data confidentiality provisions
• Auditors are able to review both the MAS and the FMC system.
• Official language used at the end of a project

Singapore courts must have the power to enforce this agreement if the provider comes from outside the country.

3. Ongoing Monitoring and Oversight

FMCs need to check the efficiency and risks of the companies they are using to perform services. This includes:

• Comparing the performance of a service against the set SLAs
• Conducting checks every few years
• Keeping in touch with the provider
• Revisiting risk after major events occur

Should any service providers cause regulatory violations, MAS will hold the FMC completely accountable.

4. Notification to MAS (for Material Outsourcing)

For material services or activities, the FMC has to:

• Check with MAS before you implement any arrangement for your doctor.
• Complete and present both a risk assessment and contingency plan.
• Give out more information if it is requested

Examples of material outsourcing are IT systems used for fund operations and outsourcing big parts of compliance functions.

Risks and Mitigation Strategies

Many risks accompany the outsourcing process such as:

• Errors made by the outsource company are examples of Operational risk.
• If a provider fails to do well, it could cause harm to its clients.
• Practical consideration: Not following a contract or protection of data
• Cybersecurity risk is about unapproved use of data or unauthorized data breaches.
• If you put too many eggs in one basket, you increase your concentration risk.

Strong risk management in outsourced fund management functions is therefore essential to ensure long-term stability and compliance with MAS expectations.

In order to avoid these difficulties, MAS recommends that FMCs actively follow certain measures.

• Ensure your business has a strategy to keep running and how to end in the event of disaster or closure.
• Whenever possible, set up two ways to deliver services.
• Train all provider staff in the rules for compliance.
• You should agree in the contract that MAS can inspect and oversee the project.

Offshore Outsourcing Considerations

FMCs have the right to outsource abroad as well, as long as they demonstrate that to MAS.

• All suitable data protection and confidentiality laws are followed by the provider.
• Cooperating in regulations with a foreign authority is possible for MAS.
• The legal validity of contracts is not reduced in any way.

When offshoring tasks include handling customer data or regulated activities, the firm should carry out enhanced risk control and record these safeguards.

Conclusion: Outsourcing Is a Privilege, Not a Loophole

Through outsourcing, fund management companies in Singapore are able to grow their business, bring in worldwide knowledge and concentrate on their main strengths. Even though it is an international facility, it must still comply with regulations.

The model encourages companies to use external sources but also asks FMCs to:

• Make sure to do thorough due diligence.
• Always be in charge and accountable
• Having strong control systems for risks is important.
• Refer to and follow both the Guidelines and related announcements on outsourcing.

In the end, using outsourcing should consider efficiency as well as obeying regulations and safeguarding investors. FMCs can ensure their licenses stay valid and they keep their stakeholders’ trust with good outsourcing practices by following MAS guidelines.