Utilities in the funds industry would remove frictions and complexity. Nicholas Pratt hears why the funds industry has a terrible track record at collaborating to build them.
*Bill Gourlay, Thomas Tilley and Simon Swords will discuss the need for utility bodies in the funds industry at the FundsTech Forum conference, which is organised by Funds Europe and takes place April 25 in London.
When three of the biggest names in asset management – JP Morgan Asset Management (JPMAM), State Street Global Advisors and BlackRock – announced they were leaving the UN-led climate change alliance Climate Action 100+, it sparked a number of theories from industry observers. Perhaps it was an example of ‘greenhushing’ – whereby firms downplay their ESG credentials in fear of a right-wing backlash. Or maybe the firms never intended to stick with it and only signed up for the marketing boost.
A more credible interpretation was that the withdrawals highlighted one of the funds’ industry’s biggest failings – an inability to collaborate or develop industry-wide bodies. Instead of developing utilities, asset managers seem all too happy to do their own thing, as is suggested in the statement issued by JPMAM in the wake of its withdrawal from Climate Action 100+.
“The firm has built a team of 40 dedicated sustainable investing professionals, including investment stewardship specialists who also leverage one of the largest buy side research teams in the industry. Given these strengths and the evolution of its own stewardship capabilities, JPMAM has determined that it will no longer participate in Climate Action 100+ engagements.”
According to Per-Otto Wold, an investor in climate tech and a co-founder of analytics firm Zerolytics, JPMAM’s actions reflect a broader trend “where large asset managers are seeking to individualise their approach to sustainability, which ultimately, risks fragmenting efforts and diluting the collective impact needed for meaningful environmental change”.
“The problem is that there have always been too many vested interests and no one with either the credibility or authority is willing to pull all of the different players together.”
Bad a setting up utilities
It is not just climate change where there is a lack of collaboration in the funds industry. It is everywhere, especially in the operations world.
“It is a fair shout to say that the funds industry is bad at setting up utilities,” says Bill Gourlay, managing director of Independent Consultants Network and former regional head of fund and investment management markets at financial cooperative Swift. “The problem is that there have always been too many vested interests and no one with either the credibility or authority is willing to pull all of the different players together.”
He refers to previous efforts to establish a national or pan-European funds processing model, particularly those involving an industry-owned, not-for-profit body.
“The opportunity was an open goal in my view but, incredibly, the entities I approached chose not to pursue it,” says Gourlay. “There was an innate lack of vision and inability to work together amongst several of the market participants, which we were trying to resolve, but unfortunately the likely suspects who could have resolved this as the trusted party in the middle declined to take part.”
An eye on the opposition
Gourlay adds: “Unfortunately, when these sorts of discussions get underway you often find several people in the room specifically there to disrupt or just keep an eye on the opposition. We have also seen a number of instances where you see a good initiative get underway, but then you end up with another one trying to compete to exercise control, or protect vested interests, resulting in confusion and killing all momentum.”
In his time at Swift, one of the few well-established, global cooperatives in the financial services sector, Gourlay was in the midst of the battle between EMX and Swift, two rival electronic messaging systems. EMX launched in 2000 and in 2007 was acquired by Euroclear, but the uncertainty caused by the two competing offerings brought unnecessary costs to the industry for several years.
This was followed by the FTS Group where discussions commenced seeking to create structures in the UK to be the equivalent of the DTCC, a major market infrastructure provider in the US, but which foundered for the same reasons.
Now the issue of utilities is at the forefront again thanks to the growing burden of data management. When it comes to data, there are too many horses in the race currently, says Gourlay. “If I’m a data consumer, which one do I back? Are they all heading in the same direction? I don’t think so. Many of the offerings out there are primarily commercially driven and seeking to make money, so the industry will need clarity and leadership before progress can realistically be made.”
To date, there has been an unwillingness to let the industry forge its own direction, says Gourlay. “Several innovative characters have tried to initiate change but have not been given the right mandate or support. There are always interesting ideas but they often lack the authority to drive adoption or the certainty that this will be the solution for the industry to go for.
“If directors or senior executives commit to these projects, they run the risk of losing their job if they don’t eventually succeed.”
So instead, the job goes to middle managers in these working groups who are often too nervous to risk making recommendations to their senior leadership, according to Gourlay, and he adds that if the industry is to succeed in making changes via a utility it needs to be brave and decisive, but that will require “respected entities at the heart of it to show clear support and point the way forwards”.
Standardising fund data
While utility efforts of the past focused on funds processing, the current focus is on standardising fund data. The European Fund and Asset Management Association (Efama) set up the European Fund Classification system in 2012 to ensure that investors comparing cross-border funds are comparing like with like.
“What sets our classification system apart is that it is completely free to use and super transparent. All the information is publicly available”
“Efama got involved because it is important that the asset management industry stays on top of this,” says Thomas Tilley, senior economist at Efama. “What sets our classification system apart is that it is completely free to use and super transparent. All the information is publicly available,” says Tilley.
Another initiative is openfunds, which is designed to be an extensible and free-to-use standard for categorising investment funds. According to openfunds, it will enable the automated transfer and validation of fund data, thereby making it easier to disseminate fund information.
And then there is the European Single Access Point platform developed by ESMA, the European financial markets regulator, to improve the availability and access to financial and ESG data. It is set to be implemented later this year and has been backed by the fund associations of Germany and France, among others.
There are similar developments in the UK where The Investment Association has partnered with fintech Fundipedia to develop a platform for product data. Fundipedia was founded in 2007 with the ambition to become the leading end-to-end data management platform for the asset management industry.
“When you peel back enough layers, you recognise patterns across firms. Asset managers are drowning in client and regulatory reporting requirements and in their rush to meet reporting deadlines often double up on the data they are buying and not applying sufficient data governance or applying it retroactively due to time constraints,” says Fundipedia managing director and founder Simon Swords.
It is what Swords dubs a macro-problem. There’s no added value or secret sauce involved. Consequently, data management is another area that appears to be crying out for a utility.
A turning point for Fundipedia was its acceptance into the accelerator programme run by the IA in 2020. “Following our acceptance in to the 2020 cohort we went to the IA to see if we could agree on a standard way for storing and disseminating product data. Coincidentally, the IA had an existing benchmarking software they needed to retire so we talked about Fundipedia taking this on.,” says Swords.
Fundipedia will replace the existing solution ECHO in the next couple of months. Following ‘go live’, the plan is to hold a series of workshops to identify more commonalities and then commoditise that process.
‘Open asset management’
Swords says that his long-term objective is to develop an open asset management market, akin to the open banking market in the EU, where product distribution and associated factsheets and other regulatory and client reports can be produced in an open and transparent way that is industry-led, fair and affordable.
“There are challenges, of course. Firstly, a sensible balance must be struck between the utility being industry led and providing value and remaining sustainable. Secondly, finding a sufficient buy-in from asset managers to buy in to this new commoditised approach will take time,” he says.
Fortunately, the attitude across industry is changing, says Swords. “There are some economic drivers which mean that asset managers cannot just offshore everything to Portugal or India. They also recognise that the bar for ROI [return on investment] from their new and existing suppliers must be set higher, which is something we welcome.”
Adoption and access are both key to the success of any utility and regulation might help to achieve success in both areas. But, as much as Swords would like the help of regulators, he accepts that this is a lofty goal that won’t happen overnight.
*Bill Gourlay, Thomas Tilley and Simon Swords will discuss the need for utility bodies in the funds industry at the FundsTech Forum conference, which is organised by Funds Europe and takes place April 25 in London.
