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A DD review can take up to eight weeks.  It relies on the asset manager answering 1. The Pre-Audit Questionnaire, 2. time to review policies and procedures and 3. ability to sit down with key individuals within the asset manager, to cross check what was written down, anything that needs to be understood further and any process to be reviewed.


If there is something specific to be covered off during the DD review by the client then it can be included.  


Due Diligence (DD) Review

A Due Diligence (DD) review and the subsequent Report cover:


  • Systems and Controls – operations working as they should and monitored for any conduct risks

  • Governance (committees, ToR, Action Logs etc)

  • Oversight – senior management have the appropriate management information on the business

  • Risk identification – based on appropriate and accurate MI to avoid risks becoming issues

  • Risk and Action logs  - are acted upon and monitored (to identify and control risks)

  • Processes are reviewed

  • Procedures are followed

  • Compliance with rules, regulations and principles

  • Fund compliance – to deliver compliant financial products

  • Treating Customers Fairly – customers are at the heart of the firm

  • Investment process – followed and controlled


Carried out by

        1. Pre-Audit Questionnaire (PAQ) sent to the asset manager

        2. Request for Policies and Procedures for reviewing

        3. On site visit to meet various departments to understand how the theory is translated into the

            actual management and delivery of a compliant financial product or service

        4. Report written with summary of key points


The follow up due diligence site review is conducted on site with key personnel who can talk about the following sections:


  • Corporate Structure – the Firm, Risk, Compliance, Operations and Investment Management

  • Corporate Governance and Risk Framework – to identify if there is a system in place to raise risks and escalate where necessary to allow the senior management and board to review and identify any areas of conduct risk within:

    • The Business

    • The Products and Services

    • Clients

    • Markets

    • Anything that could affect the brand

  • Also covered would be the Risk Management Process (RMP COLL 6.12), Business Continuity and Conflicts of Interest

    • Investment Process and Investment Risk to Include a review of the Derivatives Risk Management Policy

    • Liquidity Management- a very high concern for the FCA and Depositaries.  The past credit crisis highlighted deficiencies; however, these deficiencies are repeating themselves from very public reporting problems with fund liquidity causing suspensions and fund closures = Poor Customer Outcomes (please see good customer outcomes) 

    • Hard to Value Assets – committee and process to include independent valuations

    • Fund / Portfolio Compliance

    • Fund Breaches

    • Fund Operations – Trade Process, Record Keeping and Reconciliations

    • Broker Selection, Best Execution, use of dealing commissions (level I & II and / or use of RPAs)

    • Hedge Share Class Monitoring

    • Technology and Systems – oversight, testing, coding and data checks

    • Compliance – policies and procedures and compliance monitoring programme

    • Training and Competency


Information Requested under a Due Diligence Review


1. Pre-Audit Questionnaire

Initial questions sent in a written format to understand the firm and the financial product under review.  Looking to get as much initial information as possible.


2. Request for Policies and Procedures

To understand, at a high-level, how compliant a firm and product are.  Along with the PAQ, these would high-light any gaps and areas to review on site.  A site visit is arranged to discuss and understand how various departments operate and how risks are identified, managed, monitored and report. 


Is the financial service and product delivered and run in a compliant manner?


Some documents might not be able to be reviewed off-site and therefore that will dictate how much time will be spent at the asset manager’s office, to review the documentation, before arranging time to meet and understand how the various departments operate and how risks are identified, managed, monitored and reported.


If an existing asset manager, it is important to speak to the client team before an actual review is undertaken to see if there are any issues that need to be high-lighted and discussed.


3. Operational Risk Management – looking to understand

  • Risk Management – Internal and External

  • Breach management – fund and department.  Compliance review and process

  • Best Execution – in connection with reviewing trade samples. 

  • Trades – pre and post checks

  • Investment and Borrowing Powers – to understand the process post investment on concentration and over drawn positions


(Post)Governance DD framework

After an initial due diligence is undertaken and the financial product is signed off, it will be important that a monitoring framework is put in place:


1.Desk based reviews (bi-annual) – helps to determine if the riskiness of the fund and asset manager

2.Product Governance reviews (annual or bi-annual) – to identify any emerging conduct risks and make sure the product is fit for purposes and can be sold

3.Investment management review (monthly and quarterly) – to monitor and “challenge” on investment performance and investment risk

For further information on how to implement an ongoing oversight process then please contact us.

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