Robin Sproull, of Bonaire, looks at regulatory changes affecting Luxembourg and argues that software investment is highly needed.
In all pockets of the global economy, market volatility and uncertainty have impacted fund firms both big and small. This impact is only compounded by the numerous regulatory initiatives taking place globally.
Even in Luxembourg, where the funds industry thrives, firms are bracing for the ongoing effects of European and US regulations, such as the Retail Distribution Review (RDR), Ucits IV, the Alternative Investment Fund Managers (Aifm) directive, the Volcker Rule and Dodd-Frank.
In 2012 and beyond, regulators will be focused on protecting the end investor and bolstering confidence in the funds industry. Luxembourg fund administrators and fund firms are in a regulatory pressure cooker and must take the necessary steps to stay ahead of what is truly a revolutionary change for the industry.
The country is a flourishing fund industry hub, not just within Europe but worldwide. Even in the face of the European debt crisis and a volatile 2011, it witnessed a 4.84% growth in funds and net sales of nearly €17 billion. Much of its rapid growth over the past two decades has been fuelled by the Ucits directive, which opened the doors for the cross-border marketing of funds. Today, Luxembourg is home to the largest number of Ucits funds and total assets within Europe, with nearly 9,500 Ucits funds and nearly €2 trillion.
In light of heightened regulatory change, Luxembourg is an appealing domicile because of the country’s strong funds business – as a result, its regulators, custodians, administrators and firms have a deep understanding of the funds industry and will be quicker to adapt global regulatory initiatives for regional application. For example, Luxembourg is already far along in transposing the Aifm directive.
Just as Ucits re-shaped the European fund industry as we know it today and powered the rapid growth of the Luxembourg market – the Aifm directive presents another potential catalyst for growth as firms seek out how best to handle the directive in a cost-efficient manner.
What is clear from the directive as well as other initiatives such as the RDR, Dodd-Frank and Ucits IV, is that the regulatory agenda is heavily focused on delivering a higher degree of transparency and service to the investor. As such, there is little tolerance for any level of potential error or non-compliance on the part of the fund firm that may negatively impact the end customer.
Coupled with this changing regulatory environment, fund firms in Luxembourg are exploring new cross-border fund distribution channels, with Asia presenting a massive growth opportunity. Today, firms are looking at emerging markets regions such as Latin America and the Middle East, which are clamoring to invest in quality Ucits funds. Luxembourg fund firms may find themselves with hundreds of third-party distributors in countries around the world and this number is likely only to rise.
With stringent regulatory pressures and an increasingly complex distribution environment, Luxembourg fund firms must address three issues to stay competitive: growth, efficiency and transparency.
Firms must think strategically about growth – whether it is driven by product development or by new market segments in regions such as Asia. One method is by leveraging the business intelligence data at their fingertips. Many fund companies have access to a wealth of data they are not leveraging that can reveal which of their distributor relationships are most profitable. If they could better tap into this data, they could look at which distribution channels may present the greatest opportunity – whether by firm, country or region.
In addition, firms are exploring ways of extracting data from the distributors that enables much more transparency in respect to the underlying clients who are using the distributor to invest on their behalf. Using this data, firms are then able to amalgamate with the direct investments that the clients have made to establish revenue streams related to individual clients. If this distributor/client data is not provided, firms find it difficult to recognise the total amount of investments made by clients and this can lead to increased overheads in terms of resources needed to gather and reconcile the underlying data.
Second, because of the mounting pressure on margins as well as intensifying competition, businesses need to remain efficient. Pursuing new growth strategies can put risky strains on an existing infrastructure and cause more damage than reap rewards. Particularly as regulatory initiatives require greater compliance dollars, firms need to remain nimble and efficient with costs and operations. One way to do this is to invest in technology solutions that deliver automation to the enterprise. For example, Luxembourg fund firms can leverage technology to automate the management of hundreds of distributor relationships. One of the problems with managing so many distributors is the ability to accurately process and track payments to them all and to reconcile the invoices – and more times than most firms will like to admit, mistakes are made.
Technology can automate this process and allow businesses to benefit from the efficiencies of scale and accuracy. By automating the solution and improving the supporting workflows, firms can reduce the number of resources required for this process. Using correct data and supporting systems, companies can become more reliant on accurate and timely information.
Finally, all European fund firms need to be transparent. As a result, reporting will be key. For companies to quickly and easily generate reports on payments, for example, there must be a strategy in place now to improve the automation of the calculations and reporting required to meet the regulations.
Regulators are expecting data that is accurate and uploadable. Even though the Luxembourg fund industry is experiencing stable growth, businesses still need to be aware of and invest in infrastructure that demonstrates the transparency and accuracy regulators are looking for.
Looking to the years ahead, the challenges businesses face will grow more complex and the eurozone crisis may extend for an unknown period. Firms must invest in infrastructure and software solutions to prepare for and survive change, and to stay ahead of the competition.
Robin Sproull is director of programme management at Bonaire Software Solutions
©2012 funds europe