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The independent audit of controls environment is becoming increasingly widespread in the Real Estate Investment Management Industry. Regulatory changes, in particular AIFMD and Solvency II are likely to increase the benefits and this is expected to be an area of focus in the future. This is discussed further below
Regulatory change and independent audit of controls environment.
Solvency II
Solvency II is the comprehensive regulation of the insurance industry in the EU (more details here). Although it governs all aspects of insurance, the key impact for the real estate industry is the treatment of life insurance companies and the way in which they treat their investment assets.
To date, the attention of the insurers and the real estate industry has focussed on the quantitative aspects of capital charges. Overr the next year, there will be a much greater focus on the transparency, risk and governance aspects as insurers work on their Own Risk Solvency Assessments (ORSA). A key element of this will be an assessment of the effectiveness of the controls environment including that of service providers to which activities are outsourced.
The insurer needs assurance where services are outsourced that the controls environment at the service provider is sufficiently robust that the control environment at the insurer is not impaired. Indepent audit of controls environment is a valuable tool in providing evidence to the insurer.
AIFMD
The EU Alternative Investment Managers Directive (more details here) introduced comprehensive regulation of managers of alternative investments funds including real estate funds. The Directive includes detailed operational requirements for managers, including controls. Independent audit of controls is beneficial in two areas in demonstrating the effectiveness of the control environment:
i) for a fund manager;
ii) for a service provider to which activities are outsourced by a fund manager. This is going to be increasingly important for regulated fund managers. It is also an area of focus for the FCA who published a review of the controls over outsourcing in the asset management industry in November 2013. (Details here).
The one year transition period for authorisation for existing fund managers ran to 22nd July 2014 so this has become increasingly important as more managers have become authorised.