ASSET SERVICING: Profiting from ugly acronyms

An uneasy mood afflicts the French custodian banks as the eurozone crisis continues to generate fear. The big players are divided over where to find global growth, but they hope regulation will offer new opportunities. George Mitton reports.

In France, the asset servicing landscape mirrors that of the asset managers. A handful of large players, backed by banks, control a market in which intense competition keeps downward pressure on cost. It is a stable environment, but increasingly tense – the eurozone troubles have undermined confidence in the French banks.

And yet, changes are bubbling to the surface. Regulation such as Ucits IV, the Alternative Investment Fund Managers (Aifm) directive, and other “ugly acronyms” are creating new opportunities for asset servicing firms just as they are creating headaches for the asset managers.

The increased regulatory burden is helping to boost demand for outsourcing, already an attractive option for asset managers struggling with shrinking profit margins. With their formidable European presence, French firms hope to be at the forefront of these changes.

Because competition is so intense at home, French asset servicers believe their growth potential is abroad. Perhaps the most aggressive firm is BNP Paribas Securities Services, which under chief executive officer Patrick Colle is set on becoming “truly global” (see interview with Colle on page 22). The firm has opened offices across Asia and recently set up its first operation in Brazil.

Caceis, part of the Credit Agricole group, is making a slower entry into Asia. It has opened an office in Hong Kong and is increasing the team there. According to Jean-Pierre Michalowski, deputy chief executive officer at the company, the aim is to build a starting point for local development. From there, the firm may open another operation in Singapore, or elsewhere. “Further expansion into Asia is a distinct possibility, but we would do it the same way as in Hong Kong,” he says.

“Establishing a local presence and growing organically by servicing other group entities. After that, we can start actively seeking
local clients.”

But not everyone is seduced by the promise of the East. Société Générale Securities Services (SGSS) has a small presence in Asia, a fund distribution set-up that has been running for about three years. It is careful about investing more funds in a region where the business value has yet to be proved.

“We have a realistic approach when it comes to Asia,” says Mathieu Maurier, global head of sales at the company. “I’m being cautious because everybody is jumping on Asia. Yes, Asia is very appealing, but what is the payback?”

He says the company’s priority is to be pan-European: “We were talking to some people who said if they invest in Asia, ‘it is not for me, it is for my children or grandchildren’. I’m making an investment for the next generation.”

In the meantime, there may be other events for SGSS to consider. Chief executive officer Alain Closier is leaving the company after 34 years, with twelve years spent at the top table, to be succeeded by his deputy Bruno Prigent. And there is the revival of rumours that its parent bank, Société Générale, will sell SGSS. The bank may seek €1.7 billion, the valuation given by JP Morgan analysts earlier this year, though some say this figure is unreasonably high.

A spokesperson from SGSS would neither confirm nor deny that it was up for sale. But Société Générale chief executive officer, Frederic Oudéa, said in a press release on September 12, that he was considering selling businesses from its global investment management and services division, which contains SGSS and other units.

As he prepares to leave the company, Closier hopes he has left the business in good shape, and believes the company’s background as a bank gives it strength. “In this business, it’s important to be backed by a big bank because the industry is becoming a mix between industry and banking,” he says.

Some of the big banks rumoured to be interested in buying SGSS are Credit Agricole, BNP Paribas and Natixis.

Regulatory consultants
Another way to carve out growth in the competitive French market is by providing new services to existing clients. Regulation, which asset managers often view as a burden, may offer opportunities for asset servicing firms. They can act as consultants or even take on the burden of compliance as part of an outsourcing agreement.

Maurier says SGSS is already having more conversations with clients than in the past. “There have never been so many topics to discuss with our clients, be they asset managers, insurance institutions, pension funds. This regulation is becoming a hurdle to them. They have to understand it and they have to have all the resources it takes to adapt themselves,” he says.

This new role as a consultant could help offset a decline in profits caused by increasing cost pressure in the competitive French market, he adds. “In an activity which is becoming more and more commoditised on the custody side, we are now in the context where we have to help our clients, sorting out Solvency II, Aifm, Ucits V, Fatca, which are time-consuming and resource-consuming.”

The burden of regulation may encourage an existing trend towards outsourcing, another promising area for asset servicers.

In London, Daron Pearce, head of investment manager services for Emea and Asia-Pacific at BNY Mellon Asset Servicing, recently said demand for outsourcing will exceed the capacity of asset servicers to supply it. This will put asset servicers in the enviable position of being able to pick and choose their clients and may allow them to charge more. Indeed, he said asset managers are already being more realistic about the amounts they are prepared to pay for outsourcing.

The trend among the servicers seems to be to offer a standardised outsourcing service on their own terms, rather than agree to lift out parts of a client’s architecture.

Colle is adamant that this is the only sustainable strategy. “In our middle-office outsourcing business we have zero legacy platforms. When we pitch, it’s on our platform,” he says.

The problem with legacy platforms, he explains, is that the migration is costly and takes time. Clients have to join a queue and in some cases wait years, not months. Not accepting legacy platforms means sidestepping a potential “time bomb”.

The legacy migration problem is particularly acute when asset servicing firms are under cost pressure and worried about their stock price. They may have a queue of clients waiting to be migrated, but each migration will cost them dearly. In many cases this means clients will have to wait longer.

Any colour you want
There are firms that still think it possible to drive more efficiency out of their processes and increase their profits. Caceis has pushed the low-cost approach and continues to seek ways to streamline its business.

Michalowski believes this involves more than just pouring money into information technology (IT). “It’s not as simple as just allocating €10 million to your IT budget,” he says. “The right way is to analyse your process and adapt your IT to the best way your process has been set up. You have three different pillars to increase your efficiency. First, improving your organisational structure. Second, your staff’s skill-set and motivation and, third, enhancing your IT set-up.”

Michalowski compares asset servicing to the car industry. A hundred years ago, Henry Ford said customers could choose any colour they want so long as it’s black. Now customers can choose from a variety of models, colours and features. But they still get a standardised product that can be mass- produced.

This, he says, is the basis of a profitable asset servicing business in 2011: produce a standardised product on an industrial scale that clients can customise.

©2011 funds europe



The tension between urgency and inaction will continue to influence sustainability discussions in 2024, as reflected in the trends report from S&P Global.
This white paper outlines key challenges impeding the growth of private markets and explores how technological innovation can provide solutions to unlock access to private market funds for a growing…


Luxembourg is one of the world’s premiere centres for cross-border distribution of investment funds. Read our special regional coverage, coinciding with the annual ALFI European Asset Management Conference.