Why more fund firms are turning to legal managed services

As the fund industry evolves in a rapidly changing legal landscape, fund managers and service providers face increased challenges to navigate complexities, reduce costs, and enhance operational efficiency. Legal managed services (LMS) are a potential long-term solution to mitigate such challenges. 

LMS is the outsourcing of legal processes and functions to specialized service providers. Generally, the services range from regulatory compliance, with a focus on entity management, to contract management, due diligence and analytics. The recourse to LMS has been driven by the need for funds to manage increasing regulatory pressure while reducing costs and optimizing their investments.

Luxembourg's funds industry is subject to a stringent and complex regulatory environment created both at national and supra-national levels (CSSF regulations and EU’s AIFMD and UCITS framework, to name a few). LMS providers offer expertise in these and other regulations, ensuring that funds remain compliant while minimizing the burden on in-house legal teams. By leveraging the knowledge and technology of LMS providers, funds can more effectively navigate the regulatory landscape and significantly reduce non-compliance risks.

The use of LMS can also lead to cost savings. Through outsourcing, funds can reduce the need for large in-house legal departments, thus cutting down on employee expenses and eliminating employee attrition related costs. Additionally, LMS providers often employ technologies to automate routine legal tasks, documents and legal processes and to generate data analytics, resulting in increased efficiency. Therefore, funds can benefit from these technological advancements without having to invest heavily in their own IT infrastructure. 

Despite the advantages, some challenges may be identified in relation to LMS that organizations should consider:

1. Building and maintaining a productive and trustworthy relationship with an LMS provider requires effective communication and collaboration.
2. The handling of sensitive legal information by third parties may raise concerns about data protection and confidentiality.
3. Ensuring consistent quality of service can be challenging when legal tasks are outsourced.
4. LMS providers must navigate complex legal and regulatory environments, which can vary significantly across jurisdictions.

As the fund industry in Luxembourg is expected to grow, LMS can become a long-term strategy for many. The increasing complexity of cross-border transactions and the evolving legislative framework will further drive the demand for specialized legal services, less as stand-alone but more as integrated or complementary to tax compliance and accounting services. The concept of a “one stop shop” for managed services, including across jurisdictions, is gaining more and more traction on the market. Therefore, LMS providers, in addition to diversifying and specializing their services and technologies, are asked to closely collaborate with tax and accounting compliance specialists to render end-to-end services. The selection of the right LMS service provider for funds is a decision to be taken based on various factors (ideally, with an outlook to medium- and long-term end results) and requires the weighing-in of several internal functions. 

As the industry looks to the future, the integration of LMS will undoubtedly continue to shape its trajectory, ensuring Luxembourg maintains its position as a leading hub for investment funds.