In part two the panel talk about fees, risks and future challenges.
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: Are there cost pressures on your business? How do you balance the level of fees you command with the amount of risk and workload you are taking on?
Strandberg: There are a lot of demands on the service providers, not only to keep up with the regulation, or the IT platforms, but also to have flexibility within their product range. It’s not one-size-fits-all, as you said. You need to model that IT platform to fit that client, and then the next comes along and it’s a different type of modelling that needs to be done.
Asset managers are asking for more at a lower price because they’re going for alpha generation and facing fee compression. Although they understand there needs to be some cost, they’re not always prepared to pay for the commoditised services such as custody.
Magnusson: Clients also want transparency – to understand what they are paying for and what they get for that price. These kinds of bundled offerings might not be as
attractive anymore to many clients because the pressure to be able to breakdown costs is there, from shareholders, the broader pensioner population and the regulators. We have a very frank and open discussion with clients about this to ensure transparency. Clients are less interested in bundling fees today.
Nyberg: Prices have dropped rapidly over the past ten years. However, during the past two years, price pressure has lessened. Many clients now realise that we do not just provide a plain linear service and that risk mitigation and competence, for example, are very valuable. I wouldn’t be surprised to see prices going up in some areas because of new regulations and the complexity of conducting this kind of business.
Staffas: Custody has become a standard commodity, forcing the providers of asset servicing to offer something more than pure custody. Otherwise you will most likely be out of business in five years’ time. Additionally, the more advanced products you can deliver with higher client benefits, the higher margins you are able to keep.
Strandberg: There are three main blocks: the back office, the middle office and the front office. There is no trend in Scandinavia yet to outsource the front office and I would say that’s definitely staying where it is. However, the middle office block is where the outsourcing is being pushed from right now. So its about educating and asking the questions, ‘What is the client paying for? What do they get when we talk about a risk report?’ And the answers to those questions look different from provider to provider.
Magnusson: Everything is focused around information transparency, accuracy and timeliness today. It is all moving towards same-day sharing of information, which means everybody in the chain has to speed up and be as automated as possible.
Thulin: Speaking of the front, middle and back office, my experience has been that these descriptions don’t really exist anymore. Clients ask us, ‘If I do more trades with you, what benefits do I get by using your bank for the full value chain apart from the cost and end-to-end perspective?’ So in this case the investment bank works with the middle and back office. The whole landscape is gradually shifting and merging.
Funds Europe: In January, Sweden’s Euroclear announced its inaugural service for automating and standardising fund transaction processes. What has this meant for your business?
Nyberg: Every initiative that helps automate, reduce costs and risk in the fund processing area is welcome. Euroclear’s initiative will help our clients reduce their total cost of transactions which will benefit investors and in the end us. So I think it’s a good thing.
Thulin: I fully agree that the community welcomes everything that can make the infrastructure much more linear. But on the trading side, if you compare it with MTFs [multi-lateral trading facilities], for instance, suddenly you have many different areas where to place your funds. Banks like JP Morgan are developing their own products as well. For the really big players this presents a great opportunity, but a smaller fund company might wonder, ‘Where should I put my funds? Do I have connection to all of them? Is there room for the kind of intermediary services that guide me as a fund manager towards these without having invested a lot of money?’
The next challenge is around cost of using a platform and price, because that has always been the issue: ‘What price should I pay for having funds on that platform?’ There are a lot of things around fund investment that still need to be sorted out, especially if you go back to the depository and fiduciary roles. If I’m a depository investing other funds on different platforms, I need to have control over what’s happening and have the possibility to pull the plug if I see something that falls outside the investment regulations.
Magnusson: It will be interesting to see what happens in Norway and Denmark, where something similar is already in place.
Funds Europe: Are there any risks within the asset servicing world that are specific to the Nordic markets?
Nyberg: There are several areas that are quite specific for the Nordics. Many investment managers have not outsourced their middle-office functions to the extent they have in continental Europe. This introduces a certain level of complexity to the investor services provider, especially for fund companies as we have to integrate with their back-office or portfolio system. If they in-sourced middle office to us it would be easier to track their data.
Another difference is that the Nordics have no proxy voting services. This puts pressure on the service provider as well as the
asset managers, who has to really be on top of their agenda.
Strandberg: I think the regulation in Scandinavia is not particularly clear, it does require some clarification. It is on its way, especially around the Ucits IV and Ucits V regulations, which are now coming up.
Funds Europe: What would be the catalyst for changing this status quo?
Strandberg: It needs to be harmonised with the rest of Europe. Despite Ucits V coming on board, there are still going to be local regulations adapted, but hopefully they’re going to be more guided towards the European regulation.
Thulin: In general, the Nordic market is gradually moving towards a more global standard. This affects both those in the Nordics reaching out and global players moving into the region. Who should change first? Do the Nordic players who want to buy outside Scandinavia adapt to a more global standard, or will the global player coming into the market change to a more local one? Presumably they will meet somewhere in the middle, but there are gaps to be filled.
Staffas: Most of the asset managers are not used to buying services and products and they have built tailor-made solutions in-house, which they at least initially want to maintain. As a provider you have to make the client understand that they need to compromise in order to get a cost effective and qualitative product which is different from the tailor-made solution. The market is still learning, both provider and the asset manager have a few things to learn in terms of requirement specifications, service level agreements and service reviews.
Magnusson: There are many in-house managed companies in the Nordic region. We have had discussions with a number of clients that want to know, ‘What is the standard, and what will the regulatory changes look like?’ This is for them to understand the impact on their business as well as the potential future development needs. We are working with clients to customise the ways in which we can best support them.
Nyberg: There is one particular peculiarity in Denmark. For Danish investment associations, the local FSA requires a CCP [central counterparty] settlement which puts immense pressure on the provider to absorb risk in a way that is not seen anywhere else. You have to decide on the right type of agreement, the level of risk you can absorb and the markets available to the asset manager. It also becomes quite complicated for the asset manager, who has to have the market expertise and so forth to really understand what they’re buying. Investment associations find the regulation in Denmark strange.
Funds Europe: And how would you handle that?
Nyberg: We consider whether we want to bear that level of risk and offer those specific markets to the client. We look at whether the client is big enough to make it worth our while. We also look at the general risk profile of the client and whether they will compensate us for the greater risk we take on. This becomes costly for the asset managers and end investors. This kind of regulation drives up both cost and complexity.
Strandberg: It’s different from market to market. At Citi we still look at the Nordic region as four different countries, as there is no harmonisation across the region. As a whole, we have noticed an escape from the region. We see that a lot of the asset managers are moving towards a European sort of structure, towards the Luxembourg and Dublin structure. There are also tax discrepancies.
If we want our market to remain strong, the region as a whole needs to harmonise and look towards the European model. That’s best achieved through lobbying, having those conversations with the regulators and trying to speak to these markets with the client’s voice. But this is a big challenge because there isn’t an industry-wide forum and the markets themselves are smaller than some of the European ones, especially from the perspective of a global playing field.
Funds Europe: Do you consider the Baltic states forming part of the Nordic region?
Staffas: At Swedbank the Baltic countries are part of our home market, together with Sweden; but our client offering is local, that is, there is no Nordic Baltic product.
Magnusson: For Northern Trust the Nordic region is Denmark, Finland, Sweden and Norway. We are not active in Iceland or the Baltics.
Nyberg: Everyone has their own definition. SEB is present in the Baltics. International clients consider the Baltics part of the Nordic region. We look at it as one region in terms of packaging and distribution, service delivery and so forth. However, regional or domestic investors will look at this differently. The Baltics region is very small in terms of its P&L contribution.
On the other hand, the Baltics market is slowly growing and I think it will be very interesting to follow the developments taking place. For example, it will be exciting for us to establish an inter-operating model delivering greater synergies for product solutions and service delivery.
Thulin: It is easy to look at the Nordics and consider it to be a single region; however, it’s important to remember that it is really four countries, plus the Baltic states. When approaching local clients, we need to ensure that it is clear they are different countries, with their own local regulation to which we have to adapt. If the client is an international player and wants to buy combined services, perhaps then they see it as one region, but you have to remember that there are seven different markets here.
Funds Europe: What can you foresee as being the most significant changes within your business over the next couple of years?
Thulin: The trend we are seeing, that we are trying to adapt to, is to be much closer to the market; it’s become more and more difficult to tailor solutions and service clients from an offshore location. You have to be local to be successful in Nordic asset servicing. The more local you can be, the better it is. Then you have to define the strategy, ‘How local do I want to be? Do I want to be fully integrated to a local infrastructure or find a middle ground?’
Magnusson: I agree; Northern Trust opened an office in the Nordics over a year ago and since then potential clients that at first questioned the need for our service offering to be local have been increasingly seeking to link with us and look at ways to expand our relationships. It’s easier now to inform global organisations about the trends from the market: ‘What is important? What do the clients in this region actually think about certain things?’ It has been very important to be here and to work closely with our clients.
Staffas: I think we need to adapt all the time, but then also help our clients adapt to the new regulation. I believe this will drive and continue the trend of outsourcing either parts or the whole of your operations.
Magnusson: I think we will continue to see both clients and banks evaluating whether they can work with a global provider within certain areas and still keep the client interface.
Strandberg: But I think what’s going to be a challenge is to continue to be that consultant. I think our role will involve that closeness to the client, the understanding of the product and to be there as consultants more than anything. Today I think we are hybrids, we are a service provider and sometimes you get stuck in your service issues, but increasingly the individual’s relationship management level will be more related to the consultancy of the underlying investors.
Nyberg: In-house expertise is becoming increasingly important. We are required to get under the skin of the client to help them be more efficient and understand their underlying processes throughout the whole investor value chain.
Funds Europe: How do you see competition affecting your business?
Staffas: Competition is fierce, which is good, and I don’t think it will ease up; it will stay very competitive. So it’s a question of being able to service many different clients covering several countries and have people on the ground with rock-solid competence to service those clients. It will be very important to be local in order to be close to your clients and have expert knowledge of each domestic market. However, the financial market will continue to develop and it is impossible to say exactly what will happen. What we know is that it will continue to grow and develop with plenty of new competitors and products being introduced. There will be more business, but you will have to develop and invent your product portfolio in order to stay competitive and at the forefront.
In my view, the future looks very positive indeed.
©2011 funds europe