Along with the rollout of technology, the never-ending drip feed of regulation is keeping French asset servicing firms on their toes. In paris, Mark Latham talks to the key players.
After almost a decade, the era of low interest rates is showing only tentative signs of coming to an end soon. This continues to impact those who service the assets of investors.
Meanwhile, in tandem with new fintech, a barrage of regulations – the Alternative Investment Fund Managers Directive (AIFMD), Ucits V, the European Market Infrastructure Regulation (Emir) – has made innovation and driving through efficiencies key trends for French asset servicers.
The three largest players in the field are BNP Paribas Securities Services (BNPPSS), Caceis and Societe Generale Securities Services (SGSS).
BNPPSS services about 550 asset managers, principally in Europe – but, says Franck Dubois, head of BNPPSS France, increasingly in Asia, US and Latin America. Many of BNPPSS’s clients, he says, are under enormous pressure from regulations such as Emir and Ucits V “and of course, we are very active in supporting them and servicing them in that process”.
He adds: “The search for yield, the rebalancing of product portfolios to protect margins, is something that we have been seeing across the board.”
Global trends affecting the industry are also very visible in France, Dubois says, where diversification is another big trend. So is French investors’ strong appetite for real estate.
Another trend, he notes, is the growing appetite for exchange-traded funds (ETFs), “not so much for the diversification of product but more for cost-efficiency reasons”.
He says: “We are seeing asset managers moving from let’s say active management on some traditional investments to something which is more diversified, and behind this is a search for yield. We know today that it is difficult to have good performance purely through traditional management: this is for sure one of the trends.
“The second element is the cost dimension. We are in a very, very competitive industry and the risk management of our institutional and retail clients, their compliance management and their performance compliance keeps on becoming more and more demanding and we need to cope with that.”
Dubois mentions that BNPPSS recently put together a team of more than 50 staff members who are purely focused on new technology, blockchain and “everything around being innovative today”.
“We feel this fast-changing world with all its technological opportunities is just creating a huge field for innovation, improvement and business development, so we are very excited about it and we have become very active in digital innovation.”
Dubois says that France was a little behind the curve in terms of the global trend towards passive management, but is quickly making up for lost time.
“Now its seems to me that most of the asset managers in France these days have developed a passive management strategy and nowadays, when you service the French market, you need to be ready to service ETFs efficiently.”
So, does Dubois expect more consolidation within the industry?
“The asset management market is a very split market,” he replies. “In France, a huge part of AuM [assets under management] is managed by the top ten firms and 92% is covered by just six players. But in total, there are more than 600 small to medium-sized asset managers in France, which is quite interesting.”
He says it would be “a huge mistake to say that all second-tier asset managers are just going to disappear. The beauty of the French market is that there is a lot of innovation and among the small asset managers, there is a lot of talent and a lot of innovation.
“If a large firm takes the ownership of a smaller company, you lose the entrepreneurial mindset. An entrepreneur is someone who created his own company and believes in the future and himself.
“If he is bought out, he becomes an employee – so yes, you can have consolidation, but you lose those other qualities.”
BNPPSS has expanded in the Netherlands recently, principally because of demand from the institutional market.
Arnaud Claudon, BNPPSS’s global head of depositary and fiduciary services, says: “Warsaw is important for processing and is attracting international fund managers, so it is only logical that we grow locally our solutions. The US is also a very strategic market for us and is progressing in a very promising manner.
“In the US, we are not only supporting the middle office of clients but are also helping to support local products. We are looking at ways to fast-track our extension over there.”
Asked whether that means the possibility of non-organic growth, Claudon chooses his words carefully: “There are various ways that that could be achieved. We aim to have multiple options. Watch this space.”
A new type of customer
Jean-François Abadie, who took over as chief executive of Caceis in May 2016, says that the pace of technological change and the ever-increasing level of competition within the industry is the main challenge.
“One of the solutions is to be innovative: to have new elements of offer that you can propose to your customer and put in your value proposition,” he says.
“The second aspect is to find a new type of customer and we have done that in two ways: we have extended our coverage in Europe. For example, we are developing very nicely in Switzerland and in Italy, which are two very interesting markets and still fairly open.”
Abadie is also pleased with Caceis’s recent growth in Germany, where it is now the market leader in third-party asset servicers. “We are trying to develop also in Ireland and we are looking very closely at the opportunities that might arise with Brexit,” he adds.
Making the most of Brexit
Abadie sees business opportunities in the UK post-Brexit as the passporting of services that UK asset managers have taken for granted with EU membership comes under strain.
“Brexit is facilitating things for us as some funds will move from UK registration to a more equilibrated mix with the Luxembourg marketplace. So far it has been quite a success story,” he says.
“We are also not discarding the possibility of exploiting opportunities in the more classical area of custody of the fund administration industry.”
Abadie also mentions Caceis’s investment in developing what’s known as Teepi software – which facilitates communication between insurance and asset management firms – as an example of the firm’s engagement with new technology.
“It is clear that we need to understand where new products come in the value change and specific areas where we can make a difference,” he says.
“Teepi is a service whose purpose is not to make money but to make life easier for our clients and it is something that we are providing on a very low-cost basis.
“It is definitely a challenge and we have got to remind ourselves we are not a fintech provider but an asset servicer. But we are and will be developing technological solutions sometimes using fintech solutions.”
Tough job
Over at Societe Generale Securities Services (SGSS), Jean-François Marchand, commercial director for France, observes that the securitisation of real estate as well as ETFs are growing sections of the market for asset servicers.
“We are enriching our range of services when it comes to ETFs as processes that were done in-house by asset managers are increasingly being outsourced,” he says.
With traditional product lines, custody and administration becoming increasingly commoditised, he believes that making money in the French market is “a tough job, given the context of negative interest rates”.
“A trend that has been going on for a couple of years now is that we are moving towards more value-added services, which are perhaps less standard but where there is more room for margin.”
Etienne Deniau, SGSS’s head of strategic marketing, points to the growth opportunities in ESG investing.
He also mentions recent legislation in France that has forced asset managers to have a policy on proxy voting in companies in which they hold assets. Data on this has to be managed, which has created business opportunities for asset servicers.
Another French law, introduced last year, requires investors to report on their carbon energy impact. As a result, data on a company’s carbon footprint, for example, needs to be gathered and managed.
Deniau also points out that the second iteration of the EU’s Markets in Financial Instruments Directive (MiFID II) is an opportunity for asset managers to outsource to asset servicers.
“For distributors, investment banks and retails banks, MiFID II is a huge exercise. Our customers are telling us it will take years to be fully implemented.
“We have three months until implementation and we are still discovering huge questions that need answering.”
As an example, he mentions MiFID II’s requirements for beneficial owners to be fully identifiable. “Because of this, and for only the second time in SGSS’s history, on December 31, all pending orders for the next business day [when MiFID II comes into force] will be cancelled where we have not received from the beneficial owner all the required details for MiFID transaction reporting – such as passport number, personal identity code for some nationals or legal entity identifiers for companies.”
On the issue of investing in technology, Deniau point out the Societe Generale Group now employs 200 data scientists in France alone.
“The fintech world is something that SGSS is very much involved in, although we don’t advertise it as much as our competitors,” he says.
“The difficulty is to partner with fintech firms without killing them. It is a partnership which is difficult to manage.
“It is not about investing or buying, it is about establishing a relationship to make firms grow and benefit from the service, which is something that is not easy to organise.”
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