INDOS receives FCA authorisation to serve as depo-lite
INDOS Financial has received authorisation from the Financial Conduct Authority (FCA) to provide depository-lite services to non-EU hedge funds under the soon-to-be-implemented Alternative Investment Fund Managers Directive (AIFMD).
INDOS Financial is at present the only independent UK-authorised entity offering depository-lite. Depository-lites, under Article 36 of AIFMD, are shielded from the strict liability provisions applied to fully-fledged depositories. Managers hoping to market their products to EU investors through national private placement regimes must appoint a depository provider before the AIFMD deadline of July 22, 2014.
A number of standalone and bank-backed fund administrators have launched or are in the process of launching depo-lite services. SS&C GlobeOp submitted an application to the FCA to set-up a depository-lite in December 2013 although is awaiting approval from the regulator. Centaur Fund Services, a Dublin-based administrator recently announced it too had launched a depo-lite. Several bank-backed depositories including BNY Mellon also offer these services.
Standalone fund administrators offering depo-lites are not without their challenges. While they are protected from strict liability, this does not excuse them from liability through negligence. The FCA requires these firms to adhere to basic capital requirements and maintain extensive insurance coverage although many institutional investors would probably feel more comfortable with a bank-backed depository equipped with a sizeable balance sheet performing the depo-lite function.
Another concern at standalone fund administrators providing depo-lite is whether conflicts of interest can be adequately avoided. While those standalone shops offering depo-lite point out the latter is a separately run subsidiary, some investors and hedge fund managers are sceptical of these assertions.
There is also a strong risk the European Securities and markets Authority (ESMA) could force all non-EU hedge funds marketing to EU investors to be compliant with the full depository regime under Article 21 when it reviews its position on the AIFMD marketing passport in 2015. This could leave depository lites with a somewhat shortened life-span.