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Magazine Issues » May 2018

SURVEY: Wishful thinking

Fund professionals feel compliance costs are hampering tech adoption. So where would they spend the money if they could? A Funds Europe/Calastone survey finds out.

The telephone (the kind with cables coming out of it) took a quarter of a century to gain 50 million users globally. To gain the same number of players, it took the fourth release of online game Angry Birds just 35 days.

Here’s how long it took for other technological innovations to reach 50 million users. Radio, 38 years; television, 13 years; the iPod, four years; Facebook, a year; and Twitter, nine months.

The figures are from Richard Dobbs, a senior partner at the McKinsey & Co consultancy, who was a speaker at the Calastone Connect Forum in April.

“Are you in a telephone rate of adoption… or are you in an Angry Birds mindset in terms of the speed at which technology can be adopted?” he asked the audience.

To see just how high technology is on the asset management agenda, consider a key finding of a Funds Europe survey, carried out in partnership with Calastone. Two-thirds of the 193 respondents said technology would be the main investment area if they did not have to devote so many resources to regulation. The remaining respondents opted mainly for spending on product development or on distribution and marketing.

Collectively, though, just under three-quarters (72%) agreed that underinvestment in other parts of their business was a result of spending on regulatory compliance (of these, 16% strongly agreed).

In a 12-month period that saw the introduction of the revised Markets in Financial Instruments Directive, regulatory costs have increased by at least 25% for many. Just over a quarter (26%) said costs were up between 25% and 50%.

Meanwhile, a significant 20% of respondents challenged the notion that regulation had created a better outcome for customers – though 48% thought regulation was serving investors well, and 7% held this view strongly.

Whatever the case, it looks like investors are paying for it: in the survey, 79% of respondents thought investors would ultimately pay the end cost of regulatory compliance.

George Mitton, international editor of Funds Europe, said: “Everyone involved in asset management grumbles that the effort, time and cost required to comply with regulations is increasing. Our survey helped to quantify this sense of frustration.”

A total of 93% of respondents said they thought regulatory costs were rising, with respondents most likely to estimate that costs were going up between 0%-25% a year at an average asset manager, he said.

“Interestingly, there seems to be an intimate link between compliance costs and technology. Two-thirds of respondents told us that if their regulatory costs fell to nil, they would spend the remaining money on technology investment. There appears to be a pent-up demand for fund technology that is not being met because regulatory demands are swallowing firms’ resources,” he added.

Tangible possibilities
If regulatory budgets were removed, unleashing a pent-up demand for tech on an Angry Birds scale, where would budgets be spent? Some 51% of respondents said the back office was most in need of tech investment. Nearly a quarter of the other respondents nominated middle-office and customer relationship management systems.

Given the records-keeping function of the back office, there is almost certainly a link between this finding and the fact that 43% of respondents felt blockchain would have the biggest impact on the funds business.

Perhaps unsurprisingly, we found that legacy systems were the biggest obstacle to the advancement of technology in fund management, in back offices and beyond. In total, 80% said legacy systems were a problem for the funds industry and 38% held this view strongly.

By definition, legacy systems have been around a long time and likely will not be gone any time soon.

Edward Glyn, Calastone’s global head of client relationship management, summed up the situation for the forum’s benefit.

“We actually have some major challenges ahead,” he said. “Regulatory projects are stifling innovation; there’s an underinvestment in product development; some back offices are really creaking; asset managers are struggling to successfully implement new technology; margins are being massively eroded, particularly in a market which is becoming increasingly crowded. Gosh, the list goes on!”

But rather than giving up, he viewed it as one of the most exciting times to be in the funds industry, with firms focusing on the next generation of savers, big data providing “major, never-before-seen” insights, and new market entrants. And the possibilities for asset managers were becoming more tangible, he said.

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