Between new demands from asset managers and shifting dynamics in client relationships, transfer agents could stand to benefit from stormy weather
How are the transfer agency needs of asset managers changing? Are providers keeping up?
Chris Spencer: Broadly, yes. Transfer agency is increasingly about added value services, becoming less about transaction processing and registration management and focusing instead on areas such as distributor servicing, market knowledge and entry support, compliance understanding and interpretation, risk management,
and mitigation.
Operational activities are centring more on anti-money laundering (AML) and know-your-client (KYC) models, as well as client finance and client money handling.
Asset managers are increasingly looking to transfer agents to assist them in managing down costs, rationalising fund ranges and providing greater insights from data to help develop propositions for their customer and distribution chains. Consequently, the relationship between the transfer agency provider and the asset manager is shifting from supplier-client to something more open, collaborative and strategic.
Thierry Zuppinger: There is an expectation now that providers offer much more in the way of services than the traditional investor transaction process and shareholder registry. This ranges from specific functions such as trailer fee management to a general need to have more timely and detailed information.
We see a lot of activity from transfer agency providers who are investing in systems and processes to offer more services, information and transparency to their clients.
Andy Chesterton: Against a backdrop of increasing product ranges and growing expectations of charge reduction, the more enlightened asset managers are expecting transfer agents to come out of the back office and contribute more.
Transfer agents have become a critical influencer in the end customer experience from the initial engagement of investors and distributors, through to growing relationships via the efficient delivery of key activities around trading, distributions and customer communications. Across the market, but most particularly in the retail space, it is now essential that transfer agents provide a modern, flexible service at a significantly lower transactional cost.
One of the ways for the more progressive transfer agents to achieve this is to invest in the adoption of digital technology to improve straight-through processing rates. Designed properly, today’s modern digital solutions can provide the flexibility to process multiple data sources across multiple operational systems via a ‘straight through’ pipe. Such solutions can also provide self-servicing options for investors and distributors resulting in a real win-win administration delivery model with technology automating nearly all of the previously time consuming, and sometimes error prone, manual work.
Modern transfer agents that have adopted digital technology can provide slick, reliable services at the right price.
Etienne Carmon: Asset managers’ transfer agency needs are driven by international regulations such as the Alternative Investment Fund Managers Directive (AIFMD), UCITS V, the Packaged Retail Investment and Insurance-based Investment Products (PRIIPs) regulation, the US Foreign Account Tax Compliance Act (FATCA) and the Automatic Exchange of Information (AEOI), and soon, the Markets in Financial Instruments Directive (MiFID) II, as well as local legislation such as the Luxembourg rules relating to money laundering. Asset managers ask transfer agents to perform much of the new due diligence duties and to stock the related information, which is relatively complex in terms of processes and systems.
Aside from regulation, change in the industry is also driven by technological advances via financial technology companies, which facilitate distribution by using web tools to help simplify the investment process for end-investors. Asset managers must implement their own costly ‘fintech’ solution or seek a joint venture with an existing fintech provider to ensure they do not lose out on distribution opportunities. In France, fintech companies have the same status as asset managers and sell investment products. Therefore, they are becoming a competitor in the asset management world as well.
To compete with fintechs’ web tools, transfer agents must develop web solutions to help investors invest directly into funds, but current regulations are holding the transfer agency back in terms of new account openings, limiting their scope to investments only.
Are you seeing an increase in outsourcing, or more clients choosing to bring services in-house?
Chesterton: To date, we have not seen evidence of any significant lasting change in the long established preference of asset managers to outsource transfer agency on a third-party administrator (TPA) basis. However, there are certainly indications emerging of a change
in outlook from asset managers looking for a fresh administration approach. A number of these are expressing a serious interest in bringing services in-house, considering the level of oversight
asset managers need to wrap around the transfer agents as a potential driver.
Another key driver is the ability to reduce manual administration overhead through digitisation. To put this into context, Bravura has had more discussions about insourcing with asset managers in the last six months than we’ve seen in the last six years. We should also remember that several of the biggest UK financial institutions have very successfully self-administered over a long period of years.
Despite this, it seems clear that a sizeable majority of asset managers would still prefer a TPA to provide an efficient streamlined transfer agency service rather than bringing services in-house. As technology providers there is no reason we can see to recommend one approach over the other, as the degree of automation is available in either scenario on the software we supply.
Zuppinger: In general, with volatile markets and movements of capital, asset managers are assessing their cost base and where reductions can be made—particularly moving a fixed cost base to a variable model. In many cases anything that is not core to
the business, particularly back office processing, is a candidate
for outsourcing.
We have seen a trend of greater outsourcing to transfer agents, especially for functions that use or require investor transactions such as commission calculations. However, there is also an opposing desire for asset managers, particularly those with multiple transfer agency relationships and outsourced functions, to collect significantly more information from their service providers to better manage and monitor their business, and the performance of those service providers.
Carmon: We see a general trend. Smaller asset managers are increasingly keen to outsource ever more services to asset servicing companies, due to the rising complexity and speed of change with respect to the current regulatory environment. Some of the larger asset managers have the financial mass to absorb the development costs of adapting to new regulations, but for many, outsourcing various tasks and duties remains the most economically viable option.
In terms of the size of tasks outsourced, we often see requests for services for small local issues, such as Chinese investor signature validation, not just for larger projects. Finally, we have never once had a client re-insource any part of their business following a decision to outsource.
Spencer: It is still very much the trend for asset managers to outsource more rather than less, as they recognise the value this can bring to their business. There is very little evidence throughout Europe of any asset manager taking anything material back in house.
We are seeing that those organisations that already outsource are generally looking for fuller outsourcing models. Similarly, those on second-generation outsourcing deals are moving to an ‘adopt, not adapt’ standard transfer agency service model as they look to benefit from greater efficiency gains and best practises.
The primary drivers for outsourcing have shifted, however. In the past the largest driver for outsourcing has been straightforward cost reduction. Now, we are seeing a shift towards cost avoidance and risk reduction as a direct result of relentless regulatory
change globally.
How has regulation affected transfer agency? Does this differ by jurisdiction?
Zuppinger: In recent years, coping with regulations has been widely perceived as the biggest challenge the transfer agency industry has to deal with. Developments in various regulatory regimes have posed challenges in terms of providing adequate oversight as well as the accuracy and reliability of record keeping with implications for technology, organisation and business model.
In particular, the importance of gathering, processing and storing data needed to meet KYC and AML requirements increases year on year. The advent of FATCA in its original form but also in the likely emergence of ‘global FATCA’ with country-specific unique features has further exacerbated the information garnering process around any new fund investor. Also, the more far-reaching Organisation for Economic Co-operation and Development Common Reporting Standard (CRS), under which 53 jurisdictions have agreed to exchange tax information from 2017 onwards, will require transfer agents to implement due diligence and on-boarding procedures in order to identify the tax residency of account holders, as well as to provide adequate reporting if required.
In terms of recordkeeping, AIFMD and recent UCITS regulations create an obligation for fiduciaries to ensure the safety of their client assets, which poses requirements with regard to the accuracy and reliability of the fund investor records kept with the transfer agents.
Last but not least, recent regulations, such as the Retail Distribution Review (RDR) in the UK, MiFID II in the EU or the upcoming Client Relationship Model 2 in Canada (which would introduce an RDR-like regime), require transfer agents to deal with considerably more complex trailer fees payment processing on behalf of asset managers, which takes into consideration, for example, the type of the fund, the type and domicile of the investor, whether the fund distribution is domestic or cross-border, and more.
Spencer: Transfer agents are affected by regulation in much the same way as other parts of the asset management industry. There is a fine balance between managing resources to satisfy regulatory change and focusing efforts on innovation to support the future development of our clients’ businesses.
Interestingly, regulatory change also presents transfer agents with an opportunity. As complex regulations are being pushed onto asset managers, they have in turn looked at the third-party transfer agents to help them find a cost efficient, robust and preferably automated solution.
Transfer agents are ideally connected and positioned to take a leading role in assessing the business impact of regulatory changes. Examples including FATCA, CRS and the upcoming MiFID II have pushed asset managers and transfer agents to combine their in-house technical knowhow to help understand the regulation, how it filters down to respective jurisdictions and then how to enhance the transfer agency systems and processes to deliver the solution.
Further, on top of the impact of new regulation, governing bodies are putting pressure on asset managers to increase their oversight of transfer agency responsibilities, which can vary by jurisdiction.
Chesterton: The unprecedented degree—and pace—of regulatory change in the UK in recent years has put enormous pressure on asset managers and transfer agents. As major pieces of regulation such as RDR in the UK and European MiFID reforms aim to create a fairer, safer market for investors, this has created demand for increased transparency and a better service at a lower cost.
While regulation rightly aims to protect investors, it has increased the administrative burden, which has opened up an opportunity for increased automation alongside the provision of new access routes for the investor. Investment in suitable technology can address and reverse the challenges of increased risk and higher costs that can often accompany regulatory change.
Sometimes, regulation has unintended consequences. In the UK, there is a growing consensus that RDR has resulted in an advice gap for certain categories of investor and it is encouraging to see the Financial Conduct Authority (FCA) work with the sector to explore ways that technology can help plug this gap without increasing cost.
Carmon: Regulation has had a very heavy influence on the transfer agency business. Look over the list of UCITS IV and its European passport, AIFMD, FATCA and AEOI as well as the upcoming MiFID II, PRIIPs and UCITS V. Then there are the various local regulations such as the UK’s RDR, the Netherlands’s similar distribution laws, and many other national legislative initiatives including taxation.
This not only directly affects the transfer agents in terms of development costs, but also focuses resources on dealing with regulatory issues rather than developing new services to simplify the investment process and facilitate fund sales. With the speed of incoming regulations since 2008, and overlapping regulation such as FATCA and AEOI, systems and operations have been submerged in low-added value work. The regulatory tsunami and its impact on Europe’s asset servicing industry may be one of the reasons for the EU authorities’ delay in launching MiFID II, possibly allowing companies more time to digest previous regulations.
What kind of other regional challenges are transfer agents up against?
Spencer: Currently, large asset managers are looking for transfer agents to provide a single, global operating model rather than managing several relationships across jurisdictions. In theory this makes perfect sense, but at the next level of detail, trying to maintain common processes can be challenging.
Although the basics of transfer agency are the same everywhere, support for investors and distributors is dictated by local legislation and regulatory status in the country of distribution, and of the fund domicile. For example, in all jurisdictions throughout Europe asset managers are able to record incoming telephone deals. However, if you want to listen to the recording at a later time, local privacy laws come into force impacting who can listen to the recording, for what reason and when.
Data protection is also proving to be challenging. Data protection will continue to harmonise across Europe with the introduction of a single legal framework from 2018, and transfer agents need to be able to adapt to these changes. When looking at other regions, and emerging markets in particular, the complexity of adhering to data protection rules can be a huge cost burden. In Singapore, for example, your data ‘box’ needs to reside in the island nation for domestic funds.
Chesterton: Asset managers’ aspirations are changing, and increasingly more open global markets bring opportunities to offer products across borders. Of course, such asset managers don’t want to deal with separate transfer agents in each territory. Instead, asset managers need transfer agents to offer a service that can cope with multiple currencies and languages and cater for different regulatory structures across jurisdictions. In other words, transfer agents must be confident that their systems can offer the flexibility to process local and international business.
While it is perhaps only to be expected that well-established markets such as the UK struggle to shake off legacy manual processes, we need to bear in mind that newer markets don’t have the
same constraints.
The good news for all is that technology already exists to deliver this capability very effectively across legacy business as well as new. In the end, it is always up to the asset manager to choose the transfer agent with the best processes and systems to deliver the best investor experience.
Zuppinger: Some of the regulatory developments mentioned previously have had an impact across the value chain, affecting asset management, servicing and distribution at the same time. For instance, Norway, the Netherlands and Australia have completely banned trailer fee payments for fund distribution. This means that while asset managers may lose certain distribution channels, transfer agents will no longer be able to offer some of their services, such as trailer fees payments, in certain jurisdictions.
The loss of revenue might initiate a review of current transfer agency resources and capabilities, as well as an assessment and analysis of possible future core competencies generally, and on a country-by-country basis.
For instance, this might include the provision of enhanced oversight, reporting, risk management and data analytics services that will enhance the value that transfer agents can provide to asset managers.
Carmon: Tax environments are changing continuously in jurisdictions around the world and transfer agents must keep up to speed on local developments and modify processes accordingly. There is some scope for harmonisation in the foreseeable future in many regions, particularly Asia.
Transfer agents must be ready to deal with the two regional groups promoting fund passport initiatives, as well as China and Hong Kong’s efforts to create a mutual fund recognition regime. As UCITS products may not be accepted at all in China, the transfer agents must be able to administer Hong Kong funds to be sold in China, and be capable of processing Chinese funds. This is a key challenge for transfer agents.
In Europe, the Private Placement Regime is disappearing and investment managers will have to rethink their distribution strategies with the support of their transfer agents. As pension products grow in importance, the ability of the transfer agent to meet their administrative needs becomes essential.
Finally, the major challenge for transfer agents is more global than regional. Fintech’s impact on the distribution landscape will be a paradigm shift, and the transfer agents will have to develop innovative services to stay at the cutting edge of distribution.
The US Securities and Exchange Commission is considering updating transfer agency regulations. How would this affect the industry, and are other regulators likely to follow suit?
Carmon: The impact of the Securities and Exchange Commission (SEC) regulations would depend heavily on the scope. Would it also be applicable to transfer agents of US fund managers who sell funds in Europe? If so, the impact could be large, similar to that of FATCA.
The regulation seems to fall in to two categories, firstly, ‘catch-up’ on areas where the US has been more lax, such as the requirement to establish business continuity and disaster recovery plans, which has long been the case for EU transfer agents.
The second category is the ‘me too’ rules, which address current market issues such as the establishment of basic procedures regarding the use of information technology.
This includes methods of safeguarding personally identifiable information, already under discussion for some time in the EU, as well as cyber-crime and the acceptance of electronic copies of investor identification documents, as part of the KYC process.
Zuppinger: While we do not know what rules will be adopted as a result of this consultation phase, in some ways the update is merely bringing transfer agency more in line with the regulator’s actions in other areas of the financial system. Updates on cyber-security and IT are to be expected and, we suspect, will in most cases already be exceeded by significant transfer agents. More stringent rules and requirements on registration, reporting and fraud prevention should all be welcomed as additional protection for the end investor, and also to give clarity on basic standards.
Spencer: With the SEC issuing their advance notice to the US market in mid-December 2015, it is still very early to tell how other regulators will act—if at all. What we do know is that the SEC regulations date back to 1977 and much of the proposed changes are aimed at making the rules relevant for the 21st century. The major focus is on transparency of contracts between the transfer agent and issuer, ensuring timely and complete exchange of data.
The other area the SEC is looking in to is the trend of omnibus account arrangements and the impact this has on recordkeeping services and the individual investor. With a similar trend in the UK of retail investors moving to fund platforms, it will be interesting to see how the US addresses this topic.
In many cases, EU and jurisdictional laws have already covered many of the gaps mentioned in the proposed rule changes, for example, anti-fraud provisions, establishment of business continuity and disaster recovery plans. However, once the SEC finalises its intentions I am sure we will find some differing interpretations that will need addressing, resulting in new angles or standards that others will be made to follow.
Chesterton: The majority of the proposed regulation appears to be intended to tighten up on the role of the transfer agent in providing a good and appropriate service to the investor. However, it seems that a number of the new rules, such as increased disclosure provisions, will result in a corresponding need to increase the amount of information held on technology systems. This will require further expenditure for many transfer agents, the cost of which will have to be covered in the overall value chain. That said, the changes will continue to improve protection for the end investor, which has to be seen as positive.
It remains to be seen whether other regulators will follow suit, but with many of the largest financial asset management operators being US based, this may be a moot point, as the technology requirements of these organisations tends to be driven by the US anyway.
