GIPS: The cost of compliance

Few would argue that Global Investment Performance Standards (GIPS) have brought much needed visibility to the regulatory landscape of the institutional investment market in the UK. The standards have provided a usable framework for performance presentations while allowing the industry to self regulate this aspect of its business, both positive achievements.

The UK has also advocated mandatory independent verification of adherence to the standards for those wishing to claim compliance. This verification could, in theory, be provided by any competent individual or group, however in practice the service in the UK is generally the preserve of the big accountancy firms and a few specialist suppliers. The service these verifiers provide is augmented by a number of systems available in the UK market designed to help in the process of achieving and maintaining compliance.

Performance verification is not new to the UK market and companies such as WM have historically offered third-party performance services for clients, such as plan sponsors and trustees. Traditionally this would allow clients to compare the performance of the various managers operating on their behalf on a like-for-like basis and to consolidate the results into overall fund performance.

Arguably it is from this background that the UK stance on verification stemmed and has meant that throughout the various iterations of the UK CVG (Country Version of GIPS) the UK has maintained the requirement for independent verification. The UKIPC (UK Investment Performance Committee) has, with effect from January 1st 2006, adopted the updated version of GIPS and relinquished the previous UK CVG. Going forward it is therefore possible that as the standards evolve the requirements around verification could change for the UK market.

The GIPS executive committee recently announced (November 8th 2007) that, "it will not recommend mandatory verification for GIPS-compliant firms", while adding that verification is still strongly encouraged. This decision has been reached as a result of feedback from the questionnaire on "Compliance, Verification and 2010 Review" and the deliberations of the verification / practitioner subcommittee. Currently the standards state: "Verification is strongly encouraged and is expected to become mandatory at a future date."

So, assuming this recommendation is adopted, will UK asset managers continue to seek verification in the future? The answer is almost certainly 'yes' in the current circumstances for a number of reasons.

The UKIPC has long advocated verification and, in a joint statement issued earlier this year, the ABI (Association of British insurers), the IMA (Investment Management Association) and the NAPF (National Association of Pension Funds) reiterated their view on the importance of verification. While the views of such august bodies clearly carry significant weight, there are probably some more straightforward reasons why the industry will continue to pursue verification.

Consultants, when short-listing potential managers (certainly in the UK), tend to ask if a company is verified as compliant rather than simply compliant. I can see no reason why this would change, indeed the consultant could, arguably, be leaving himself open to accusations that he was not acting in his client's interest if he did not look for evidence of the highest levels of probity.

Knowing that a company had previously been independently verified and had chosen not to continue with this approach would surely then prompt the question, 'why change?' The answer may well be that the company in question felt comfortable about maintaining compliance without the help of a third party and was therefore saving the cost of verification, but whether that would be seen as a satisfactory response is less clear.

The view from the fund management community may well depend on whom in the organisation you asked. As a performance manager I see the verification of GIPS as a cost in terms of time and money.

We have established procedures and systems to meet our GIPS responsibilities and I would not expect these to change even if we were not being verified. The work undertaken by staff involved in the GIPS process would remain, with the exception that they would not need to assemble samples of data for review by the auditor. Therefore, I believe the performance team derive little direct benefit from the verification process. However, if you were to ask some of my marketing or business development colleagues I would expect them to have a rather different view. For them the opportunity cost of not being verified is potential lost business. While it is very difficult to produce any empirical measure of the impact of this the prevailing view would certainly be that it is safer not to find out.