Depositary Banks Need Common Standards for Effective Due Diligence
by Susanna Scheffold, Head of Global Securities Services, Global Transaction Banking, UniCredit
Time and cost pressures caused by new regulation and increasing emphasis on risk management are proving problematic for depositary banks undertaking due diligence. Fortunately, common industry standards are already being developed – and these can go a long way to alleviating these pressures.
A combination of regulation and increasing risk awareness has made reliable and effective due diligence a major priority for many depositary banks. But progress on this front has been stifled by the cost of obtaining sufficiently high-quality information.
Indeed, many banks are exploring new – and expensive – means of assessing and reducing risks in their networks, employing external audits, guarantees and legal expertise in due diligence workflows more frequently than ever.
A fast-advancing regulatory agenda only serves to increase the urgency of new due diligence procedures. The Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings for the Collective Investment in Transferable Securities V (UCITS V) set out entirely new regulatory frameworks for risk management.
In light of these developments, many depositaries are checking their network relationships to identify unreasonably risky connections. And while this is proving a somewhat cumbersome task, work to create new common standards for due diligence is beginning to bear fruit – promising to eliminate much of the workload associated with these checks and pave the way for large increases in productivity.
Cost and complexity
Certainly, the importance of such standards must not be underestimated, as ever-increasing volumes of information continue to ramp up the complexity and cost of due diligence procedures. Indeed, due diligence reports are becoming ever more unwieldy – with pages numbering in the hundreds – and contain questions on a range of highly specific and often tenuously related minutiae, such as “Does the headquarters have parking spaces within 10 metres?”
Businesses are rightly concerned that answering such questions may cost more in resources than they are worth in risk management benefits. A lack of any consistent approach between depositary banks adds to this burden, as each has its own opinion on what should be asked in the course of proper due diligence. As it stands, respondents must devote attention and resources to researching responses for each questionnaire they receive.
Convention makes convenience
This is the underlying cause of the problem: a lack of consensus regarding the information depositaries should use for counterparty due diligence.
Solving this problem will relieve much of the burden incurred by current due diligence practices. Depositaries will no longer need to mull over the information they require – since it will be decided collectively – and counterparties will no longer need to undertake bespoke research for each questionnaire.
Of course, creating conventional standards and reaching consensus on what constitutes important data will not be straightforward, especially in Europe’s fragmented regulatory environment – while overarching regulation has been introduced through AIFMD and UCITSV, regional variations in approach and interpretation remain.