Initial experience from the field –Audits of portfolio manager

Audits of licensed portfolio managers in accordance with Art. 17 FinIA follow new requirements. If the portfolio managers are affiliated to the AOOS, auditors collect various modules of the supervisory audit. Initial practical experience clearly reveals several sticking points to be considered.

 

Byipp Mösch
Lead Auditor, BDO Financial Services, BDO AG

 

What is the aim of the audit?

The supervision of licensed portfolio managers within the framework of the relevant laws, ordinances and the respective affiliation agreement is the responsibility of the supervisory organisation (SO). The AOOS guidelines for supervisory audits with regard to self-regulatory organisation (SRO) audits and SO audits sets out the framework conditions and guides both portfolio managers and audit firms on audit and reporting (AOOS 2021). Supervision takes a risk-based approach and the supervisor is generally entitled to request all information and documents necessary for this purpose.

The reports of the licensed audit firms or the lead auditors provide a reliable picture of whether, in addition to applicable laws and regulations, the affiliation agreement and the supervision and audit concept are complied with at all times. In addition, the report highlights any risks, weaknesses, irregularities and/or recommendations relating to the audited company (AOOS 2021). Irregularities and recommendations are now classified in more detail and should be identified as “high”, “medium” and “low” (AOOS 2021, p. 7 et seq.).

 

Audit of portfolio managers – initial insights from the field

The new supervisory concept sees a shift in the focus of the audit firm for audits of portfolio managers. Key areas of discussion are outlined below by area:

Corporate governance

The management or organisation of the portfolio manager must be designed in such a way that it can fulfil its statutory duties at all times (Art. 9 para. 1 FinIA; Art. 23 FinIO). Pursuant to Art. 26 para. 4 FinIO, FINMA may also require more complex portfolio managers to have an internal audit function, although this is not required in principle.

Special mention should be made of changes in the organisation, including within the board of directors or management. For example, according to previous FINMA practice, it has not been necessary that each member of the board of directors meet the qualification requirements as long as the board as a whole is sufficiently qualified (Dispatch FinSA/FinIA, p. 9023). However, FINMA may stipulate that the majority of the board of directors has to be independent of the body responsible for management (Art. 23 para. 3 FinIO).

Outsourcing and delegation

Art. 14 FinIA stipulates that delegates must have the necessary skills, knowledge, experience and authorisation. The portfolio manager is responsible for monitoring and instructing the delegate and bears the consequences of any violations by the delegate. The specified control rights must be exercised accordingly and the delegate’s accountability obligations must be monitored (Art. 17 para. 1 FinIO). It should also be noted that FINMA Circular 2018/3 “Outsourcing” is not directly applicable to portfolio managers under Art. 17 FinIA.

Cross-border business

FINMA expects authorised portfolio managers with cross-border business activities to take appropriate organisational measures to ensure compliance with foreign law. The applicable cross-border instructions or ICS regulations serve as the basis for the auditor’s assessment.

Deputies

From the point of view of the SO and FINMA, deputies are generally assessed as persons who take on a deputy function and who must in principle meet the same requirements as the person being represented. This has to be ensured in particular when representing the person responsible for qualified management or risk management and compliance.

Basic and further training

Art. 12 para. 3 FinIO generally requires financial institutions to ensure that employees are suitably qualified with regard to their business activities. In addition to employees, the obligation to regularly document the basic or further training also includes other persons who work in the context of a staff leasing arrangement – for example, persons with functions relevant to FinSA/FinIA (Dispatch FinSA/FinIA, p. 8966 and Art. 22 para. 1 FinIA in conjunction with Art. 23 para. 1 lit. b FinIO).

Sampling

For audits based on random samples, the AOOS supervisory audit guidelines stipulate that a risk-oriented approach is to be applied. The selection is based on EXPERTsuisse’s Auditing Practice Note 70 (PH70) (AOOS 2021, p. 5).

Reporting by the audit firm

Within the scope of SO audits, reporting generally takes place via the AOOS portal. In order for the transmitted data to be legally valid, a digitally signed or physically signed document of the transmitted data must also be submitted. While the digitally signed version can be transmitted via the platform, the physical printout must be sent by post (AOOS 2021, p. 6).

 

Closing remarks

FINMA has publicly stated on several occasions that it is committed to a risk-oriented authorisation process that takes account of the special circumstances in each individual case. All authorised aspects and the relevant legal requirements must be complied with at all times. The related processes and appropriate implementation and documentation should not be underestimated – early planning with the audit firm supports an efficient workflow.

 

 

Biography

Philipp Mösch is a senior auditor at BDO Financial Services in Zurich. A FINMA-approved lead auditor in accordance with CISA, he has extensive experience in the internal and external auditing of banks and securities firms. He lectures on the subject of bank accounting at the Lucerne University of Applied Sciences and Arts. Since graduating in business and economics from the University of Basel (2012) and becoming a Certified Swiss Public Accountant (2015), he has built up his expert status in various positions in the industry.

E-mail: philipp.moesch@bdo.ch

 

Sources:

AOOS 2021: Wegleitung zur Aufsichtsprüfung zu SRO-Prüfungen und AO-Prüfungen der AOOS. (AOOS guidelines for supervisory audits with regard to SRO audits and SO audits). Retrieved on 22 July 2022. https://www.aoos.ch/_files/ugd/e43b16_1b7a8ae24db1445ba260b41ecb34891c.pdf

AOOS SO regulations: Reglement der Aufsichtsorganisation nach Finanzinstituts- und Finanzmarktaufsichtsgesetz. (Regulations of the supervisory organisation pursuant to the Financial Institutions and Financial Markets Supervision Act). Retrieved on 29 July 2022.
https://www.aoos.ch/_files/ugd/e43b16_bfbbf21cf84b4923bddebca0ca70cd27.pdf

Dispatch FinSA/FinIA: Botschaft des Bundesrats zum Finanzdienstleistungsgesetz (FIDLEG) und zum Finanzinstitutsgesetz (FINIG) vom 4. November 2015. (Federal Council Dispatch on the Financial Services Act (FinIA) and the Financial Institutions Act (FinSA) of 4 November 2015). Retrieved on 22 July 2022. https://www.fedlex.admin.ch/eli/fga/2015/2141/de