With the return of the risk appetite, service providers to the Nordic market need to up the ante and provide clients with a range of products they can move into quickly and that more suit their individual requirements. Edited by Angele Spiteri Paris
Niklas Nyberg (Global Head of GTS Financial Institutions, SEB)
Anne-Sofie Strandberg (Director, Client Manager, Citi)
Ann Magnusson (Deputy Manager, Nordic Business, Northern Trust)
Henrik Staffas (Head of Fund Services, Swedbank)
Bo Thulin (Executive Director, JP Morgan Worldwide Securities Services)
Funds Europe: What do you think are the greatest challenges or opportunities within the Nordic market?
Niklas Nyberg (SEB): One area that has become challenging, though simultaneously very interesting and, indeed, at times fun, is regulation. There has been a tsunami of regulation that is flooding the market and there’s no end to it; from MiFID to Ucits IV, and soon Ucits V. This is the new reality of the world. You have to interpret, understand, adapt and finally implement these changes or it will be near impossible for you to survive as a provider.
On the depository side, the regulators are pushing us towards more transparency and independence from the banks and I welcome that initiative because investors have already come to regard those aspects as essential. Local providers are conducting a more thorough due diligence on global provider vehicles including third-party providers, which obviously affects us at SEB.
Anne-Sofie Strandberg (Citi): Also, what we see is a higher level of sophistication among investor clients. They are looking for more types of products to move into very quickly. They are turning towards the service providers to help them find those, which means, from a service provider’s angle, you need to have those different products ready and you need the IT platforms to follow. This is a challenge for the entire industry, but it is positive change that will bring about good opportunities.
Ann Magnusson (Northern Trust): Risk appetite has certainly returned. The client base is looking at different types of investments such as private equity, derivatives and real estate deals. It means the provider has to be able to support them and also to reinvest in these capabilities not only to reflect regulatory reporting requirements, but also to ensure they insulate clients from these investment decisions.
Henrik Staffas (Swedbank): Clients are increasingly demanding, both on instrument types used and request for asset servicing. They are also shopping around for services that they previously have done in-house, for example, risk and performance reporting. But I also think that the regulatory impact will be very high. For instance, in its response to the EU Commision’s public consultation on the Ucits depositary function, the Swedish FSA is suggesting that the depository shall not be affiliated with the fund management company, in effect banning the Swedish banks from acting as the depository for their own funds.
Bo Thulin (JPMWSS): Many asset managers, pension funds and institutional investors are now considering the post-crisis operating model with a greater focus on risk and compliance, whether upgrading their internal functions or outsourcing certain functions.
Funds Europe: If this rule on depositories goes ahead, how would that impact on your business?
Strandberg: It doesn’t make such a big difference to us at Citi because our model is slightly different from the local Swedish banks. We always treated the custodians and the fiduciary as two different and separate vehicles. We see one controlling the other and not being the same. That’s something I think people are now waking up to; that maybe it should be an independent review of a service provider rather than the provider controlling itself. I believe it will go even further into the fund’s accounting, where the vehicle will not be allowed to actually calculate its own accounts.
Staffas: I still believe that the Swedish banks can continue to perform the depository service for their own funds, but it must be done more professionally than it historically has been done. Furthermore, I think that if the Swedish FSA was more proactive in communicating and deciding on the guiding principles for the depositary service, the market will be able to adopt a common practice, making additional regulation unnecessary.
Thulin: When JP Morgan entered this market a couple of years ago with the depository bank, it brought with it the international model which requires fund companies to provide more information, which helps the back office to function better.
The FSA needs to provide more guidance around, ‘What is required from me as a depository, and what does that mean in terms of segregating different functions?’ And ‘What requirements do I have to put on the fund community?’
Another new challenge facing the Nordics is around recruitment – finding the right people to work on risk and compliance, developing and retaining them. Traditionally, they haven’t had that sort of profile in an organisation and, suddenly, everyone wants to have a new risk manager or compliance officer, and it’s difficult to find them.
Magnusson: I agree with you, and can see that when I meet with clients, too. The risk and compliance managers within the client’s organisation are much more involved in the discussions with you as an asset servicing provider.
Staffas: That’s a definite trend; they are now much more interested in compliance issues, for example, receiving periodical reports on limit controls and risk reporting, both financial and operational.
Magnusson: Some clients have even started to talk about risk classes instead of asset classes. Certainly post September 2008, understanding the risk and being more transparent about it is a prerequisite. One thing that we have seen at Northern Trust is that socially responsible investments are a very big trend in the region. The investors want to know, for example, ‘If I invest in a fund-of-funds, what are the underlying implications from a carbon footprint perspective?’ Service providers have not only to be able to offer compliance services to clients, but also more sophisticated reporting and transparency.
Funds Europe: What were the most significant changes that took place within your business over the last year?
Magnusson: At Northern Trust, we were lucky to have a strong strategy for growth in place and a commitment to the Nordics. We have seen a 30 per cent increase in the number of new clients coming on board over the past year in the Nordic region. Being based out of the Nordic region has made a change for us, too. We now have relationship managers and business development services in Stockholm and were granted a licence for our Nordic investment management business to also operate from Stockholm, which we announced in January. The pace of client’s globalisation has not abated, and this means our services as a global organisation have to be truly global.
Nyberg: The biggest shift I experienced last year was SEB’s ability to leverage our strong position as a prime broker and custodian, combining our service delivery to benefit the client. We noticed that many asset managers are moving from the traditional to the alternative space and, conversely, some historically alternative providers to the traditional space. Operating like a multi-strategy provider, SEB leverages and capitalises on the competence and technology that we have in the bank to service this broad spectrum of strategies and clients.
Strandberg: At Citi we continue to increase the amount of awareness of the local regulation. With the company’s global reach we have a lot of knowledge sitting in central Europe, London and Luxembourg, and we can further strengthen that if we are going to stay in the Nordics. We look to act more as consultants towards the clients and not so much as a product-packager, asking, ‘What do they need?’ ‘What type of structures are they putting in place?’ The underlying clients are changing their buying behaviours and we are certainly following and adapting to these changes.
Staffas: Swedbank experienced two significant changes last year. On the custody side, technology development in co-operation with JP Morgan continues to be crucial, and that’s basically to support two things – the upcoming regulatory issues, and also to develop the added value services to the clients in terms of corporate action, information and reporting. Second, we have successfully introduced a new fund services product enabling our Swedish clients to outsource their fund administration to Swedbank.
Thulin: At JP Morgan the main change has been the increasing footprint in the Nordics. Now we have more than 50 people on the ground supporting custody and, of course, that has inevitably brought with it a lot of new requests from clients. Some clients approach us themselves; some come through Swedbank, our local partner in Sweden. The requests are very much for middle office function requirements. They need help with risk and performance management, fund administration, third party evaluation or OTC [over-the-counter] derivatives and so on. This is something we have experienced a lot and it definitely affects how we want to run the business in the Nordics.
The industry is now looking for more than just a provider, it is looking for someone to partner with so it can grow and develop over a period of time. This is a huge difference to how it was a couple of years ago.
Magnusson: Clients have started to think, ‘What is our core business? If I am a bank investment manager, pension fund, insurance fund, why do I want to invest in these technology platforms? Is there a better way to achieve the same thing by utilising my service provider more effectively?’
Funds Europe: Is outsourcing becoming an issue for some of the local fund managers that used to do it themselves?
Nyberg: For many years Nordic asset managers used to do everything themselves, but now there is a clear trend that they want to offload some of their administrative workload and increase competence by partnering up in certain areas. We have seen a dramatic change in terms of interest and long-term thinking which, I think, is driven by regulation, risk management and competition.
Magnusson: The perception of outsourcing has changed dramatically. Now it’s one of the key things that the asset managers and asset owners think about. They have realised that they can remain in control of their dealings and, at the same time, avoid the large, continuous capital reinvestment into old legacy systems that do not ‘do the job they need them to do’. Flexibility and tailoring to your specific clients’ needs is paramount.
Staffas: We are definitely beginning to see a change in how the local fund managers perceive outsourcing. Previously, outsourcing was not an option, and the drivers are also changing. Earlier, outsourcing was mainly used to cut costs and get rid of a problem. Now there is another view, they think, ‘Maybe someone else can provide a more professional service enabling us to focus on our core business. We could get lower operational risks and better services, for example, improved compliance checks, etc.’ There is a big change in the mood of the market.
Strandberg: I have heard many clients say that one of the biggest challenges with outsourcing is that they are still required, by regulation, to keep the control function in-house. They can see the anticipated cost benefits of outsourcing, but they still want and need to continue to have that control internally. However, the search for alpha makes it more and more challenging to look at the outsourcing model in comparison to keeping it in-house. This highlights the fine line between what they should outsource and what they should continue doing themselves.
Thulin: The industry is not yet clear on what functions can and cannot be outsourced. The industry is asking, ‘What am I allowed to do? What can I outsource?’ And finding answers takes time. No one has the final answer yet.
Furthermore, outsourcing has become an issue of strategic positioning. Remember, a number of Nordic institutions made significant IT investments about five to ten years ago and now they want to either upgrade that, which requires a lot of investment, or try to remodel the way their business operates. Then, suddenly, outsourcing becomes very much a strategic decision for the management to say, ‘How do we want to position ourselves in the next five to ten years? And based on that, what does that mean, what kind of decision do I need to take today in order to meet that requirement?’ It’s no longer just a pure back office, operational, cost-driven exercise; it’s more the strategic positioning of the companies that drives this.
Magnusson: Also, it’s not one-size-fits-all; if you want to work with clients on building an outsourcing solution, you need to be able to adapt and listen to where they are in the process in the first instance and what’s important for them.
©2011 funds europe