Mark Davies offers an experienced examination of modern due diligence procedures.
The last time I penned some thoughts on this was way back in 2016 but it is time to regroup and look at the current situation as I believe the industry is at a quite exciting point. Firstly, let me go over some history as to how we have got where we are today.
In 2016, after heavy lobbying from the sub-custodians, there was a move to unify all the different DDQs into one single DDQ that would satisfy all the requesters’ requirements. The belief was that this would:
- satisfy all the requesters’ regulatory requirements,
- save a huge amount of effort on the side of the responder community (my estimate was up to 95% in year two and beyond),
- save a large amount of time and effort on the side of the requester community.
AFME had assumed the mantle to be the coordinator of the effort. All the global custodians and the broker dealer community were invited to participate in producing a standard DDQ for use by the industry. After a substantial amount of effort, the standard AFME DDQ, consisting of eight hundred questions, was produced to great acclaim, and welcomed by all parts of the industry. By far the majority of requesters in the industry have adopted this DDQ and use it on an annual basis today. A huge step forward!
There always have to be some negatives, otherwise it wouldn’t be worth looking at. The industry itself and the world have not stood still. What had been thought would be a fairly stable DDQ is far from it. The world has endured many things: COVID, which stopped physical due diligence for a couple of years; an increased cyber security awareness; the conflict in Ukraine; something called ESG, and overall, just a greater awareness about the importance of reviewing risks.
The 2023 AFME DDQ has just been released, which has increased in size again. This is an indication of the depth of due diligence now required in today’s environment as well as the increased scope. This does not include the proprietary questionnaires which are sent in addition (some of which are pretty sizeable), mainly by the global custodian community. Although the responder community has benefited from the existence of the standard AFME DDQ; the huge, forecasted benefits have yet to be truly realised. Why?
Not foreseen by most was the downside of the use of Microsoft Word to release the document to the wider world (with the notable exception of Simon Shepherd – MGTL).
The document was translated into various versions of an excel file by the companies offering to host the DDQ process. All very commendable but all incompatible with each other.
The result is that responders are forced to have various versions of their DDQ response available, depending how they receive the request, rather than a single interoperable source as originally envisaged.
However, there is now a light at the end of the tunnel. AFME, with some excellent prompting by Sally Jacques at Standard Bank, agreed last year to lead the initiative to provide a version of the DDQ in a data-readable excel format to be adopted by the industry as a whole.
This will enable the responder community to hold one version of the DDQ which will be compatible with whatever portal they receive the request from. Good progress has been made, although unfortunately the standard excel file isn’t quite available yet, fingers crossed it will be available later in 2023. If not, 2024 will be the breakthrough year.
In the meantime, using a portal such as CODUDE from MGTL which replicates the AFME questionnaire down to the last comma, enables the uploading of responses without even waiting for a request, as well as access to the enormous benefits of being able to review the question-and-answer deltas at the click of a button.
This kind of interoperability and automation serves to further streamline the due diligence process. The tortuous reach for the prize of standardisation becomes that much easier, even in the face of the mounting size and complexity of the AFME questionnaire.
CODUDE will be READY to process the new AFME standardised excel format whenever it is released and is the lowest cost solution on the market.
- 1 – 50 Requests: £4,000
- 51 – 100 Requests: £8,000
- 100+ Requests: £12,000
- FREE to Publish for Responders
Please let us know if you would like to learn more about this innovation.
Mark Davies, April 2023