Our KYC expert on AIMFD and its compliance implications

In his latest blog, our KYC expert looks at the importance of compliance in the alternative investments sector

The strong aim to get moving again - especially in Europe - coupled with possibilities surrounding existing opportunities, are driving important new initiatives around the world.

In recent weeks the latest report on alternative investments prepared by McKinsey pointed a spotlight on the important growth of such financial instruments.

Assets under management in 2013 raised the $7.2tn, more than double the level of 2005 ($3.2tn). What’s more, the growth was steady, increasing even during the global financial crisis.

Considering this boom "far from over" and agreeing that there is "ample room for a new category of leaders to emerge", McKinsey says part of this significant boost may find space in the new alternatives fund dedicated to credit.

The impulse to set up new structures and new products has been driven by many factors: the need to breathe new life in the still-slack economic growth; the seemingly reluctant attitude of troubled banks to resolve matters; Basel rules; and the difficulties of global competition. Moreover, such processes play an important role for institutions, especially the regulators which are moving to stimulate an appropriate offer to investors. The Irish probably lead this process, but many other European countries are joining, with most also considering renewing the alternatives sectors deriving from the now-fully operative Alternative Investment Fund Managers Directive (AIMFD).

How do you prepare for such expected grown in credit funds? Asset managers, in many cases, should review their organisation; investments in loans of whatever nature imply the design of dedicated process and the inclusion of internal competences. Structured alternative asset managers will have to consider new valuation processes, new monitoring systems and new forms of reporting. Even the investment teams may require the inclusion of new professional standards.

It’s largely assumed a new perspective will also come on anti-money laundering; where there’s not a direct link between asset managers and the final beneficiary of loans, one will be subject to reputational risk that goes beyond a regulatory request.

In these instances, Know Your Client processes become not only a mandatory request but an important instrument to face this key risk for the business head-on.

Read more about Know Your Client

Read more from Massimo Paolo Gentili