Fund managers: why Circular 18/698 might surprise you

in Regulatory/Compliance, 08.10.2018

The CSSF’s new circular, 18/698, was released one month ago. Although it will require a bit of work to implement, its aims are pure: to create a level playing field for UCITS ManCos and AIFMs, expanding on the existing principle-based approach but with a more prescriptive touch. The circular was written with practical findings on ManCo effectiveness in mind, taken from inspections and older CSSF reports.

In an industry that is anticipating bigger volumes of business (new funds) due to Brexit and other macroeconomic changes, the circular, with its ambition to harmonise the field, comes at a good time.

My team and I have been watching this regulatory landscape evolve in the funds sector for years, (and I myself have a fair bit of hands-on experience as the former head of a third-party AIFM in Luxembourg), and we’re intrigued by this new circular. In this blog post we have compiled three insights about it that may not have been completely obvious from the text itself.

This is your last chance to lock in your digital transformation.

Nobody is arguing that digital technology is seeping through every sector and industry, transforming business models, processes, and companies themselves. It is also a hackneyed comment that it’s taking longer in financial services, and particularly asset management, than in other areas.

But this circular drives home that now even regulators are expecting data flows to function in ways fairly alien to the norms of ten years ago. Part of the circular’s effort to harmonise the industry means that it requires systematic and large-scale flows of information, including systematic documentation and audit trails. In other words, data must be collected, processed, treated, documented, and reported in fast, transparent, reliable ways. Old technologies just won’t cut it for this.

This circular isn’t actually about substance. It’s about operating models.

This new piece of regulation isn’t just about substance. It targets the broader subject of the operational effectiveness of ManCos by touching on AML, prescriptive substance requirements, reporting provisions, key function organisation, delegate oversight, and more. It’s about upheaving the ManCo’s structure and capabilities, so it must be approached from a holistic perspective.

To that end, it’s a circular that should be tangled with in the boardroom, rather than just among compliance officers. Proper evaluation on how to set up, transition, and transform the operating model is essential—and the transformation will, in some cases, take some tricky engineering, given the circular’s look-through requirements and its ambitions for scalable document-analysis and due diligence.

The value of your business is now safeguarded by governing bodies.

Your conducting officers hold greater importance than ever before, given the circular’s specific resourcing requirements and time-allocation measures, as well as its implications on questions of outsourcing vs. insourcing. These new obligations, alongside the increased operational requirements, will probably necessitate more support to senior management, i.e. systems and protocol staff.

These staff members would, for example, help with fixing cross-function incompatibility (PM/RM, PM/valuation, or RM/valuation for illiquids), applying the proportionality principle, and organising the governance of the board.


This new circular, from a broader perspective, is quite exciting. It anticipates, and ushers in, a smoother, faster, and more digital world of asset management. However, before the sector can boast of such a reality, a lot of groundwork must be carried out—and given that it has immediate effect, the time to start is now. Asset managers should begin their readiness/gap analysis soon in order to put together a roadmap for further action.

For more insights on Circular 18/698 and how it affects the big picture, and no less the small picture, please visit our webpages here and here, or contact me directly.

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