The IMS Group

The Leading Compliance Consultancy

Originally published in the April 2012 issue

It may have always been a misnomer that hedge funds were unregulated. Yet there was a time not so many years ago when the regulatory burdens that managers faced seemed proportionate relative to the risk profile being faced by investors. In 2012, the regulatory environment has become decidedly more burdensome, time consuming and costly to hedge fund firms.

The IMS Group, founded in 1997 by Scott Wilson, has been recognised for a second year running as The Leading Compliance Consultancy. In 15 years, IMS has gone from being a sole trader run by Wilson to a broad-based and trusted compliance advisor operating with a large client base on both sides of the Atlantic. The firm grew strongly through the 2000s owing to the growth in numbers of alternative and often boutique asset managers during that decade. It didn’t stop post-2007 either and has doubled its number of employees to almost 60 in the UK since then.

Nor is it likely that the firm’s best days for growth are behind it. Backing from private equity firm Sovereign Capital gives IMS the resources to build on its market-leading position with continued expansion. The most recent step is the merger with HedgeOp Compliance LLC, a leading provider of specialised compliance software and consulting services for investment advisers in the US. The deal means IMS now has offices in New York, Boston and San Francisco to go along with the one in London.

The enlarged IMS is now even better established with over 700 alternative investment clients currently drawing on its key consulting services. The range of the offering helps make IMS a key partner of hedge fund management firms (amongst other types) across a range of sensitive and mission critical areas.

Pragmatism and prioritisation
IMS has distilled its hedge fund client offering to two core aims. Peter Moore, Head of Regulation and Compliance, sums these up as pragmatism and prioritisation.

“Compliance is a bit like insurance,” Moore says. “There are no finite boundaries or perimeters about how much you need or should have. You will likely always wish you could have more. But in the real world, compliance resources and budgets are finite. The compliance service we have endeavours to simplify the relevant rules and regulation in a pragmatic way. That pragmatism is combined with a focus on explaining the essence of rules and how they may apply in a practical sense in the context of someone’s business.”

By focusing on pragmatism, IMS ensures that clients understand the impact of regulation and are prepared for it. But it is done in a sensible way and at an appropriate cost. The second core aim, prioritisation, seeks to provide hedge fund clients with a timeline for meeting changing and evolving regulatory demands, while giving them a roadmap for action.

“Right now there is a huge wave of new regulation being introduced in response to the financial crisis,” says Moore. “In recognition that firms’ budgets are finite we try to tell them in a timely manner the order in which the new regulations need to be met. Deadlines often change. There is not a need to worry about a lot of detail for something that might be scheduled to happen in three or four years. We will inform them but not snow them under with detail of any debate that may be raging, say, in Brussels until the potential change becomes determined, more imminent and more tangible.”

Pillars of core service
With hedge funds comprising around a third of IMS’ clients in the UK, it is clear where the firm’s priorities lie. IMS has identified four steps or pillars in the core service it supplies to engaged clients. The aim is to help a hedge fund meet its regulatory obligations in a proportionate and sound manner.

The first pillar in the IMS approach is to ensure that the hedge fund client sets up the right corporate and governance structure. In recent years, the Financial Services Authority has raised expectations about what is required by way of governance irrespective of the size of the manager. Even small firms with just half-a-dozen staff need to show procedures that ensure robust governance and appropriate controls. A start-up hedge fund which has drawn its founders from a much larger organisation (investment bank or hedge fund group) won’t always have the procedural knowledge to develop FSA-compliant corporate governance.

“Any small firm comes to a point where it needs to think of itself as a corporate,” says Moore. “The essence of what I’m getting at is that better business decisions will be made through a partners meeting than just through individual decisions. A good framework for that would be encouraging the firm to make more important decisions through the medium of board or partnership meetings. This is one of the key building blocks of sound corporate governance.”

The second pillar of the core service IMS provides for hedge fund clients is to set up a policy and cultural framework for the firm proportionate to the complexity of the firm regarding the regulatory obligations relevant to the firm. Given there are around 50 different rule books promulgated by the FSA it is vital that managers identify the eight or nine that are relevant to them. For this, IMS advises a manager which rule books are relevant to their activities. The aim is to give a policy framework to the relevant staff at the hedge fund so they understand their key regulatory obligations.

The third pillar is an ongoing assessment from IMS. Here the goal is to help hedge fund clients assess on a continuing basis that their policy framework continues to be fit for purpose. IMS visits clients regularly to ensure that policy and procedure is being followed. Even though IMS is acting as a service provider it is looking to introduce and build a healthy level of independence among the staff of the hedge fund client.

The final pillar is to help firms prepare for the future, but do so in a flexible and proportionate way. Part of this is keeping hedge fund clients abreast of regulatory change and undertaking the preparations to embrace it. Importantly, the focus is on doing so in a manner that helps hedge funds understand what changes are coming as well as their magnitude and relevance.

Meeting FSA obligations
“Our biggest client sector grouping is hedge funds,” says Moore. “It is a consequence of the fact that many hedge fund managers are boutique corporates where the sort of service we provide is an appropriate one. Most of the work we do is helping our clients know, understand and meet their obligations as an FSA-authorised firm.”

IMS aims to help hedge fund managers avoid regulatory pitfalls and make FSA registration as straightforward as possible. Of the UK regulator’s three current priorities – conduct in the public capital markets, the distribution of retail products and ensuring deposit taking banks and other systemically significant financial institutions remain solvent – it is the first that is primarily relevant to hedge funds.

“The one that is most relevant to hedge funds is anti-market abuse controls,” says Moore. “That is the key area of focus of the regulator that is relevant to institutional asset managers.” He notes also that the RDR, which will ban commissions on new fund sales, may impact the sale of UCITS funds, an area that is considered ripe for expansion by hedge fund firms in both the US and UK.

IMS has helped steer large numbers of US hedge funds through the regulation and tax issues of setting up an office in London. “That is the rationale of them coming to us,” says Moore. “If a US firm has identified a business need to have a UK or European presence we help them get comfortable that the regulatory cost of that presence will not erode the business benefit of having that office. There is a regulatory cost but it is a manageable one.”

Handling AIFMD
A brief look at the Alternative Investment Fund Managers Directive shows how IMS operates. As the Directive evolved over three years IMS has kept clients informed through periodic reports about the regime’s likely implications. The key message has been: don’t worry about AIFMD unduly, but when it is finalised calmly work through the implications.

“The reason we haven’t pushed the panic button in response to AIFMD is that it has changed and moved a lot over the last three years,” says Moore. “We are now approaching the end game where our research is getting deeper and we are finalising the solutions to AIFMD that we will make available to our clients. With AIFMD there are a few different outcomes and to a lesser degree a few different possible dynamics so it becomes critical to tailor the solution to the particular client.”

Another regulatory front where IMS has been active is in making hedge fund firms aware of the impact of mandatory registration with the Securities and Exchange Commission. “We started back in June 2010 making firms aware who it might impact,” says Moore. “Over the course of two years we have led them and assisted to the point that those that needed to register did so by either the 14 February or 30 March deadlines.”

The tie up earlier this year with HedgeOp is further burnishing the ability of IMS to cover US compliance and regulatory matters with similar depth to its UK and Europe coverage. Though the various regimes are separate and different there is some crossover, particularly in two areas. One is where IMS clients in the UK are subsidiaries of US firms. The second is the result of increasing extraterritoriality of US regulations, which means a big proportion of the firm’s UK clients are increasingly becoming subject to it.

“The tie up across jurisdictions is eminently sensible as it allows us to offer seamless coverage and multi-jurisdictional assistance,” says Moore. “The breadth and depth of our coverage of UK, US and European compliance matters is second to none.”

Other services
IMS also runs a recruiting service that focuses on helping clients that use its compliance consulting find staff to run internal compliance and operations. “Since many of our clients are start-ups, it lends itself to them using our recruitment service,” says Moore.

The firm also provides training programmes on compliance procedures for anti-money laundering, market abuse, senior management obligations, anti-bribery and marketing and financial communications. The training programmes extend from new hires to senior managers. A new venture with specialist training firm Eukleia Limited is seeing IMS offer training through an online medium to its clients.

“The growth of demand for compliance – both for in-house roles and consulting services – has certainly been good for our business,” says Moore. “But at the same time as financial services firms have had that demand they have been under market pressure. Thus demand is up but firms and budgets are under pressure. We seek to be sensitive to that in our pricing, concentrating on building long-term relationships rather than front loading our fees or seeking to extract a fear premium.”

Michel van Leeuwen
Group CEO

Van Leeuwen joined IMS in 2010 as Group CEO and has a 20-year track record of delivering sustained value in the financial services and technology sectors. He has specific operational experience in investment management, risk management, capital markets and applied technology. Previously, he was Managing Director, Worldwide Capital Markets at Microsoft.

Stephen Burke
Group Director

Burke has nearly 25 years’ professional services experience, firstly as an auditor and then as a regulatory consultant primarily at PricewaterhouseCoopers where he was director of their UK Investment Management Practice until 2006. He has considerable regulatory experience covering authorisation, ad-hoc advice, enforcement and error remediation.

Alan Leale-Green
Group Director

Formerly Chief Executive of Regulatory Solutions Limited, Leale-Green joined IMS in 2011 as Group Director, following IMS’s acquisition of RSL. He has over 35 years of experience in the securities and futures industry and has worked for a number of city institutions.

Peter Moore
Head of Regulation and Compliance

Moore has worked in financial services regulation and compliance continuously since 1995. At IMS, he leads technical analysis, product development and maintenance and service quality control. Moore has been consulted to fund management firms since 2006 and joined IMS in April 2007. Previously he worked on an FSA policy team.