The funds industry faces intense operational pressure from proposed regulatory and other changes. Euroclear’s Scott Caine says firms must do more to embrace automation if they are to keep their business agenda on track.
As the 21st century has advanced, the boundaries of the possible have expanded sharply. The funds passport has removed many of the barriers to pan-European distribution. Dynamic websites with the ability to capture customer data, digital video and big data studies have transformed marketing and communications. But with each advance has come new technological and regulatory challenges.
The past two decades have been transformative for Europe’s funds industry. It is often forgotten that until the late 1990s, offshore investment was largely limited to institutions and wealthy individuals. UCITS funds did not take off until the end of the decade, and until the advent of UCITS III and the launch of the euro in 1999 cross-border distribution in Europe was a constant battle with currency, linguistic and regulatory barriers.
In recent years, there has been an intensifying focus on identity issues – in regard to both customers and counterparties. The need to identify the underlying beneficial owner, for the purposes of the US Foreign Account Tax Compliance Act (FATCA) or to ensure investor eligibility in a given fund, is a continuing headache for a fund management industry with limited access to distributor-level information. Counterparty due diligence has also become market practice.
The speed of change in the digital world has put new demands on technology teams. While the shift to hand-held devices is changing the way information is accessed and displayed, an intensifying cyber threat requires better and tighter firewalls. Getting it wrong can be costly – and could get more costly in the future. Firms that breach the EU’s proposed new data protection law could be fined up to 2% of their global turnover.
A mounting ‘external’ agenda
That is just one example of the mounting ‘external’ agenda – comprising tax, regulatory and legal changes – to which fund managers and wealth managers find themselves subjected. The pressures of regulatory compliance are increasingly hijacking the business agenda. Sometimes those changes are introduced in an impossibly short time-frame.
Given limited resources, firms experience real tension between ‘what we would like to do’ and ‘what we must do – and quickly’. With the pressing need to prepare for the new Markets in Financial Instruments Directive (MiFID II), that tension is not going to go away. The consensus is that, for most firms, compliance will require a year’s worth of systems development.
Here are some of the challenges. The directive will require identification of the underlying legal entity holding funds. This represents a big leap for the industry and puts a premium on segregated accounting in the trade processing chain – something that Euroclear already provides. The directive will also impose quarterly valuations, transaction reporting that is more than twice as detailed as now, and a requirement to advise clients if they suffer a fall in value of more than 10%.
More information must be provided on best execution policy, trading venues and above all, timings. In a market where trading takes place in milliseconds, firms must have the infrastructure, and the connections, to execute immediately and time-stamp with absolute accuracy. The delay of one second can alter the price achieved and call into question best execution.
The new regime on the disclosure of costs and charges also raises concerns. All firms will have to produce illustrations based on aggregate costs. For platforms in particular, getting the information and aggregating it may be a major challenge.
Maximising STP is key
To compete in this environment, firms must retain their focus on the core business and concentrate resources on higher-value services. That can only be done by deploying technology to manage routine functions, scale processes, and drive out manual intervention. Straight-through processing is essential.
There are understandable concerns that ever more STP will degrade the provision of personal service. But the rise of the ‘robo-adviser’ in the US suggests those fears can be overstated. There is a new generation that finds a smart phone ‘app’ preferable to a lengthy conversation with a personal adviser. If automation can reach into the advisory area, it can surely extend to many more support services.
The advent of the personal savings allowance and flexible ISAs from April next year raise a host of questions.
How will fund managers and platforms accommodate withdrawals and then reinvestments in ISAs within the same year?
The answer to this question has to be found within the next five months.
The larger a firm is, the more difficult it is to retain the necessary agility. One answer is to partner or outsource to a more agile player.
Another is to look at hiring new skills, such as specialists from the world of gaming to help redesign websites and deliver mobile services. Above all, it pays to choose business partners that have made the investment in scale solutions and are plainly continuing to do so.
At Euroclear, we are committed to making the continuous investments that ensure timely compliance with upcoming regulatory requirements, while giving us the ability to respond quickly to the unexpected.