Technology used to support regulatory compliance will transform asset management by facilitating digitalisation, says Tom Pfister of Confluence.
Since its introduction and buoying by organisations like the Financial Conduct Authority (FCA), the term regtech has quickly taken hold in financial services. For asset managers burdened by regulatory fatigue in the years following the financial crisis, regtech is both timely and necessary. Its merits will further push the asset management back office towards digitalisation.
Regulation across the asset management industry has shifted towards the management of systemic risk in recent years. The management of systemic risk has been the logic behind requirements such as the EU’s Alternative Investment Fund Managers Directive (AIFMD), US Money Market Fund Reform and the SEC Investment Company Reporting Modernization Rule (SEC Mod). Each of these regulations is designed to give regulators enhanced visibility into systemic risk.
The increased amount of regulatory scrutiny has been a profound burden for the industry. Many asset managers now have to deliver hundreds of disclosures to regulators and statistical data collectors. These disclosures are on top of reporting to investors and internal clients. Asset managers are not only dealing with the volume of reporting – deadlines have also become much shorter, which in turn places a huge additional pressure and cost on asset managers.
These challenges are forcing the industry to change how they approach regulatory compliance. In the past, regulatory compliance was treated as a burden. It was carried out because it had to be carried out, with little underlying strategy. Likewise, responsibilities have been spread across various internal legal, risk and accounting teams and possibly external fund administrators. The problem is that, because each of these teams use their own systems, it is difficult to streamline internal processes. As a result, regulatory reporting has been a complex, fragmented, costly and time-consuming endeavour that has not provided much strategic benefit to the firm.
The industry is starting to change, with asset managers beginning to think more holistically and strategically about regulatory compliance reporting. In order to achieve this change in approach, asset managers need to invest in automating and streamlining their back-office processes. These benefits are the promise of regtech.
Regtech utilises advanced data automation and information management technologies. Regtech solutions typically include the latest developments in analytics that enable the efficient vetting of transactions and client data, effective management of data, quick and standardised digital reporting and real-time compliance monitoring.
Regtech begets adaptability, which is vital given the rapidly evolving regulatory environment. In the past, software would have to be developed in order to comply with new requirements. As such, when a regulation is amended, firms using traditional software must go through the very inefficient and resource-intensive process of rewriting software.
By contrast, the asset management industry needs solutions that are far more adaptable to changing requirements. Cloud-based and SaaS-enabled regtech applications, which can be updated by the vendor quickly and cost-effectively, meet this need. These applications are deployed immediately to all users, enabling asset managers to reduce their technology costs and respond to new regulations and changes to existing ones with much-needed speed and flexibility.
Speed and flexibility are vital, because asset managers must report hundreds of disclosures to multiple different entities. Asset managers need a solution that can handle a broad range of requirements, aggregate and reuse reporting data, and consolidate multiple systems on to a single platform. The result of a single platform will be to deliver a holistic approach to regulatory compliance management.
With regtech, analytics and systems integration speed up the reporting process. Firms will also benefit from clearer analytics about their business risk, which they have not received before. As a result, some managers are aiming to use regtech to complete their reporting requirements well ahead of official regulatory deadlines in order to improve their own operational performance. We were not seeing this even 12 months ago – it is a positive and dramatic development that is unfolding across the industry.
Asset managers and service providers are increasingly allocating larger proportions of their budgets to regtech solutions, which has already begun to create efficiencies for firms that have been proactive. By adopting new and innovative ways to solve regulatory and business challenges, rather than back-filling old systems, they’ve been able to drive down costs, mitigate regulatory risk and understand business risks more effectively.
As such, regtech is providing asset managers with an opportunity to streamline their businesses from front to back office. By automating otherwise mundane tasks, staff will be freed up to add value and carry out more investigative work in order to reduce risk and ensure clients are receiving the right level of support, rather than be bogged down in manual processes. Back-office teams will therefore be smaller and efficient, with a much more analytical role than previously held.
A more efficient back office will benefit the front office and the wider business as a whole. Firms will be able to use their back-office intelligence to make operational decisions and manage risk in real time.
Improving back-office processing also offers a clear competitive advantage for attracting investor allocations, as institutional investors are increasingly demanding that asset managers demonstrate robust risk management and regulatory processing capabilities.
The benefits of automation are clear. However, many asset management firms do not have the time or budget to stay on top of regulatory mandates themselves. This is where third-party providers, such as vendors and fund administrators, who have the scale and technology expertise to pursue innovative solutions to the industry’s challenges, are increasingly playing an important role in driving these trends.
Regtech’s transformation of the asset management industry will not occur overnight, it is the beginning of a journey. Regtech is, however, the first real symbol of that transformation. Firms that actively embrace regtech both to solve their regulatory challenges and improve their overall business operating model will be better positioned for the era of digitalisation. Firms that do not take the long-term view of technology’s role in the industry will increasingly struggle.
Tom Pfister is global head of regulatory reporting solutions at Confluence
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