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5 minutes with… Castalia Compliance

by Alice Murray 10 July 2019

Lawyer Tracy Diamond discusses the drivers behind setting up Castalia Compliance, and shares her thoughts on the current regulatory challenges facing the industry.


The Drawdown (TDD): What does Castalia Compliance focus on, and who are your typical clients?

Tracy Diamond (TD): Most of our clients are small asset managers, typically those who don’t have an in-house compliance function. Or where compliance is being handled by the COO, or even CFO.

Our work is rooted in supporting implementation of regulations and governance.

Thanks to my experience – having worked for 15 years in London, Switzerland and Hong Kong as head of compliance for various banks and asset managers – I’m able to act as a quasi-chief compliance officer. I typically work semi-inhouse, either providing ongoing advice or working on one-off projects.

I’ve seen a growing problem for asset managers not receiving tailored advice. Instead, I’m able to provide pragmatic advice, which is proportionate to the size and activities of the clients I work with.

TDD: What were the main drivers behind setting up the firm?

TD: There were two key aspects. First, identifying a gap in the market for asset management compliance. To help those businesses protect themselves and grow. And to help asset managers view compliance as a competitive advantage.

The second driver was about wanting to explore alternative working practices. When I was head of compliance I was working extremely long hours; having to come in early for the Asian markets and working late to cover the US market. As a working Mum, I wanted to take control of my working hours.

The legal profession has been making strides into better flexibility, but I haven’t seen the same in the private equity industry so I wanted to create something unique and partner up with people who share a similar approach and make a change in the industry to take control of working practices.

TDD: What’s your take on the current regulatory landscape for private capital fund mangers at the moment?

TD: I think there’s a shift from implementation of the new regulations that have come in, of which there have been multiple over the last few years, towards ongoing monitoring.

The new regulations are very complex, but there’s also been a growing focus on governance and personal liability. Take SMCR (Senior Managers and Certification Regime) for example, as of December this year it will be extended to all financial services, including private capital fund mangers. And with that, there’s more focus on individual accountability; the regulator wants to know who is ultimately responsible.

Furthermore, the regulator has more powers of investigation, and has focused recently on director investigations, rather than whole firms. As of December 2018, the FCA is investigating 58 directors, compared with just 24 in 2016. I think we’re seeing a much tougher accountability regime.

I’m not saying there won’t be more regulations coming in – for example, AIFMD is under review and that is likely to spell changes. But, it’s more about how theses rules are being implemented and who is responsible.

Within the regulations that have come in recently, MiFID II came into force in January 2018, however the regulator allowed for an informal “grace” period while firms got to grips with the new rules. However, firms are only just starting to look at how they should be reporting and the inducements, even though the grace period is over.

TDD: Are managers adapting to the new rules?

TD: I think it’s difficult for asset managers at the moment. From what I’m seeing, they’re struggling with the decision to be fully compliant or taking a risk-based approach. Do they go all belt and braces, or do they put in place a risk-based defensible position?

For some firms, a light touch approach is being adopted, where they are doing what they can. Those firms typically haven’t looked at SMCR yet as they see that as something to worry about in Q4.

And then there are other firms who have seen the impact of SMCR in the banking system and know they need to bring in specialist tools or software, build processes into their HR systems and be fully prepared.
All of the incoming regulations are very heavy on process, which requires a lot of balance.

TDD: What’s your outlook in terms of industry regulations over the next five to ten years?

TD: It’s been ten years since global financial crisis and the regulatory appetite for enhanced individual accountability is growing, and not just in the UK.

Firms need to prepare themselves for greater accountability. They need to clarify and document the roles of senior management. Boards need to clarify their needs on accountability and conduct. They also need to think about diversity. There is more focus on governance and diversity on boards.

Data is another major area where I see the focus increasing over the next five to ten years. Firms want to avoid a Cambridge Analytica moment. Following the implementation of GDPR in Europe, data will inevitably be on the agenda.

TDD: What’s your top tip for professionals grappling with regulation and compliance?

TD: When a regulation comes into force, that’s only just the start of it. While GDPR has come into effect, and SMCR will soon be enforced, simply adopting a process and checking the boxes isn’t enough. The regulator expects firms to be continuously looking at their approach and constantly reviewing it so that it can be optimised.

That’s my main advice for compliance professionals; keep these rules on the agenda and incorporate the spirit into the culture of the firm. Part of that is keeping senior management up to date with what’s happening; reporting news events, if there have been fines or investigations off the back of regulations.

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