September 2017

PRIIPS & REGTECH: The sheer scale of it

Regulation_strugglesThe Priips deadline is rapidly approaching. Nicholas Pratt finds that work still needs to be done on managing the enormous volumes of data involved.

It seems inexcusable that firms should be unprepared for the arrival of new regulations affecting retail products. Fund providers have already received a year’s extension for the introduction of the Packaged Retail and Insurance-based Investment Products (Priips) directive, which comes into force in January 2018.

By the time of last year’s postponement, says Dan Simpson, head of research at JWG, most already had rough-and-ready approaches in place and the delay gave them more time to consider third-party solutions.

But there may have been a reluctance to commit more resources. “Now we are in an environment where there are many other regulations to comply with, such as MiFID II, and there is little appetite to revisit Priips. They have an extra year but it is no longer the biggest priority and the danger is that year will have been wasted,” says Simpson.

On the plus side, Priips is effectively an extension of the Ucits Key Investor Information Document (KIID), but with a few more bells and whistles, says David Pagliaro, Europe, Middle East and Africa head of State Street Global Exchange. “There are a few things that may be more intricate but there is not a huge leap of faith involved.”

Also, the industry is better at developing risk and compliance-related systems. “Ten years ago, a lot of organisations didn’t have a chief risk officer, but that’s changed,” says Pagliaro. “There are more risk resources, they are more empowered and have a department that pays attention. Plus a lot of the big complex regulations [for Ucits and alternative funds] have been done and we are at the tail-end of the changes. Institutions are much better prepared.”

Yet he says there is still work to be done on data management.

The technology involved in the capture and aggregation of data is fairly well established but the scale of the data needed for Priips is large and will require managers to make some meaningful investment in technology.

Even in this area, the experience of creating data feeds for the Ucits KIID has been helpful, says Tom Pfister, global head of regulatory reporting solutions at Confluence, though there are still a number of logistical challenges such as calculating product costs prior to execution, determining the right holding period and translating sales and marketing material into the factual product information needed for Priips reports.

And there are still some unknowns, such as whether secondary trades or top-ups can be counted as updates that need to be accounted for, whether third-country Priips manufacturers are included and how firms will have to treat environmental, social and governance funds. 

There is a tremendous scale to it all, says Pfister, but vendors and the regulatory technology (‘regtech’) industry have stepped up to help firms meet technical requirements.

Andrew Glessing, head of the compliance practice at consultant Alpha FMC, is optimistic about the industry’s preparedness for Priips.

Firms have grown used to disclosure over the past decade and while Priips may involve some complex analytics and an extensive amount of data, there is more capability and capacity among managers and service providers, he says. In addition, Priips has been quite closely defined, meaning managers have not been held back by too much ambiguity or a lack of prescription.

This means, says Glessing, that most of the additional work has centred on the harvesting of the data, including issues such as where data will be sourced from (the middle office or third-party providers, for example).

An increasing number of regtech providers are willing to act as an overlay, harvesting data from various sources and aggregating it.

“Some firms have looked to these vendors to take on that role but others want to see more of a track record before they commit,” says Glessing.

This means that a number of managers are likely to adopt a tactical approach to Priips in the short term, such as working with the European Priips Template (known as the EPT), middle offices and transaction cost analysis providers to do it themselves.

But over time, Glessing expects more firms to choose vendors to manage much of the process. “The important thing is to choose an approach or a vendor that you are comfortable with and to see Priips as part of a wider data management strategy.”

Insurance companies
One of the regtech firms providing an interface between insurance company distributors and investment managers is Silverfinch, which describes itself as a regulatory data exchange. According to managing director John Dowdall, the big difference with Priips is the involvement of both insurers and investment managers and the need to co-ordinate the engagement between the two parties.

“Priips reporting and its product governance is a new area for many insurers,” says Dowdall. “It is not just about document production; there are all the calculations, costs and charges, sign-offs and workflow. And they are dependent on feedback from investment managers to complete their Priips reporting.”

Solvency II provided insurers with some precedent in terms of reporting portfolio data but there will still be challenges when it comes to providing feedback to the investment managers – especially those managers that have ‘open architecture’ fund platforms allowing them to act with multiple distributors, rather than using direct engagement with the end distributors, says Dowdall. At the same time, he says, investment managers need to keep track of who is distributing their products and ensure that they are able to provide them with all the product costs and charges to fulfil their legal requirements else they face having their distribution routes turned off.

Another challenge is the data dissemination, says Jean-Marc Duval, product analyst at Luxembourg-based regtech firm Seqvoia. “This aspect might be less urgently considered by asset managers but it is a major hurdle. The sheer volume of data to deliver on a monthly basis can be crushing should the IT infrastructure not be ready to accommodate such volumes.”

And despite the validation of the EPT by industry body the European Fund and Asset Management Association (Efama), there is still uncertainty regarding how data is delivered, not least because new fields have been added to the EPT since Efama’s validation, says Duval.

“For example, how do you deliver data about a product with a Recommended Holding Period (RHP) not expressed in years – a very relevant question for money market funds. Or simpler yet bothersome issues such as what label to use when there is a typo in a field name in the EPT – the corrected one or the one delivered by the EWG [European Working Group].”

Above all, it is the scale of Priips that should concern both managers and service providers, says Duval. For example, a manager with 2,500 share classes will have to complete  2,500 records, which is a perfectly manageable volume. But this rises rapidly when the different indicators for RHPs and prices are added for each share class, creating more than 100,000 records with dozens of data points.

Additionally, there are the number of third parties who will need to retrieve the data, says Duval – something that has yet to be clarified. “Will this huge volume of data be delivered regularly to a single data hub where multiple third parties will retrieve it? Will each insurer connect on to the service provider’s infrastructure to retrieve the data?”

The reality, he says, lies somewhere in between and implies the need for service providers to be ready to process data queries from a much larger pool of third parties than they may be used to.

Given the scale of the data involved, another concern is how many managers are doing things manually, he says. “This is clearly not a sustainable operating model under Priips. The sheer volume of data, its complexity and the frequency at which it should be made available to third parties naturally call for automated processes.” It is not a technological hurdle, he adds. “The challenge lies with the change of habits and practices, sometimes strongly ingrained within an organisation.”

Once the Priips rules come into effect, it may be easier to change those manual habits as the scale of the task becomes evident and firms realise whether they implemented a system fit for purpose. But much of the real work will begin once the rules go live, ensuring that data is maintained and updated whenever there is a change to the product or the distribution, says JWG’s Simpson. 

“It is the need to constantly update Priips reports that is the big difference with contemporary compliance. In the past, firms may have implemented the solution once and then left it, but now compliance solutions have to be much more dynamic. That’s the objective of today’s regtech.”

©2017 funds europe