What services are financial institutions most commonly outsourcing?
There are various types of services that financial institutions and fund managers look to outsource depending on their size, budget, in-house capabilities, and purpose. In the Investment Funds arena, most funds do not have employees, and therefore hire a variety of service providers to accomplish their objectives. A Fund or Fund Manager may outsource its tax compliance function, its bookkeeping or accounting, its administration, its IT services, trading or many other functions.
You direct DMS' team of outsourcing specialists – what does this involve?
If you're looking at the Fund itself, at DMS we can assist the Fund and ensure that it's compliant with its International Tax Compliance obligations, by providing a fully outsourced solution for the Fund, by taking care of the registration of the Fund for its GIIN (Global Intermediary Identification Number) on the IRS portal, being the Responsible Officer & Principal Point of Contact for the entity, ensuring the fund follows the appropriate guidance under the jurisdiction's regulations to be compliant for both FATCA and the Common Reporting Standard, properly classifying investors under these rules, and filing accurate and correct returns under the regulations with the relevant tax authority.
We also see Investment Advisors (mainly in Europe and Asia) who set up Cayman Islands based Investment Managers wanting to outsource certain aspects away from the home jurisdiction of the Advisor. These include keeping the books and records of the Cayman Manager offshore, approving and making payments on behalf of the Fund by the Cayman Manager's independent director, executing trades and reviewing the activities of the Advisor.
What are the benefits of outsourcing?
In the scenarios I've noted above, there are clear benefits to outsourcing certain functions. With the ever-changing legal and compliance environment that the Fund industry finds itself in, it is beneficial to both the directors of the Fund and to the Investment Manger to have a reliable and trustworthy partner with whom they can do business. It is also particularly helpful when such a partner can offer combined – or a one-stop solution – eliminating the need for and complexity of engaging multiple service providers.
Having the expertise in-house isn't always practical, and can sometimes be very costly, compared to outsourcing. As a result, it is sometimes more beneficial from a cost perspective and from an efficiency perspective to outsource certain responsibilities.
What are the challenges or threats of outsourcing? How can the lead company protect its client list and brand identity when outsourcing services to a third party?
Finding the right partner, and treating the relationship as if it were a partnership is key, and this can sometimes be the biggest challenge and threat to outsourcing. Getting this wrong up front can cause significant inefficiencies which can lead to a tenuous relationship. In terms of protecting the lead company's brand and client lists, appropriate confidentiality agreements must be put in place and these agreements should also include the appropriate non-compete clauses. The firm doing the outsourcing should also satisfy itself that the firm who receives it information has adequate cyber security policies and procedures in place to protect the data.
Have you seen increased demand for outsourcing following the financial crises, as companies look to streamline?
Yes. With the increased regulatory framework on both Funds and Investment Managers, more and more functions are being outsourced, as firms look to take advantage of the benefits outlined above.
Is there anything else you would like to add?
Outsourcing within the Cayman hedge fund world isn't what you may think of when you hear outsourcing typically. As most funds have no employees and it's up to its Board of Directors to operate the Fund, many functions are "delegated" or outsourced. Ensuring that each party understands the role and function of the other, and ensuring that all parties work together to ensure the success of a Fund is paramount to success. Finance Monthly
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