Confluence
Regulation, particularly the EU’s Alternative Investment Fund Managers Directive, has to be more proportionate, says Confluence’s Nicola Le Brocq
Your background is in regulation. How does that fit in with Confluence?
My role helps bridge the gap between the financial services industry and financial services technology. Confluence has several solutions that solve regulatory data reporting problems for asset managers, and because of my background in financial services, I’m well positioned to act as an advisor on the current regulatory environment and how that fits with our solutions. I can also help with the strategic side of planning in relation to designing and developing future regulatory solutions.
There is so much regulation coming in to effect, it’s important for technology to stay ahead of the curve, as opposed to just being reactive. Often, by the time regulations actually get around to the point where regulators are enforcing them, it’s too late to be thinking up solutions for the industry. We have to be at the forefront of regulatory reform, getting involved with think tanks, lobbyists and legislators, not just regulators.
I’m also getting involved with thought leadership at Confluence. We want to get our message out there and have market players reflecting on data management on a more long-term basis. Asset managers sometimes have had to react to whatever is coming at them at that particular moment, but I think it’s a good time to start looking ahead at trying to find better ways of managing all data, so we can better accommodate their regulatory reporting obligations as a result.
What do you think will be the biggest regulatory challenges in the next six to 12 months, and beyond?
From a European perspective, we are going through quite a turbulent time politically. There are some high-level issues that will affect business, and that can have a knock-on effect with regards to regulation. Coping with the sheer volume is a real challenge.
There is so much financial regulation now, and some of it is arguably just ‘regulation for regulation’s sake’, so it’s perhaps time to take stock and evaluate what’s actually effective and what’s not performing. The pattern has been for a crisis or a failure to occur and significantly affect a particular sector before authorities plug the gap by layering regulation over it. This reactive nature means often the process is so long and drawn out that by the time you bring the legislation in to force, the business practice you are trying to address has ceased or evolved, and that piece of legislation is potentially no longer appropriate for the way the industry is operating.
The actual act of implementing regulation needs to become more nimble, in the same way that business has, with a faster reaction time, better use of technology, and more efficiency. Otherwise, it’s always going to be a case of playing catch-up.
Europe can be a real minefield of principle-based regulation—there is a call for less but better executed regulation. For example, the insurance directive, Solvency II, has taken years to come in to force, and we will still have to wait and see if it’s going to do what it set out to, following implementation.
The Alternative Investment Fund Managers Directive (AIFMD) Annex IV reporting has also been a long and drawn out process and very costly to the alternative fund industry, and we still don’t know whether it will manage or mitigate systemic risk. At the moment, the regulators are just sitting on that reported data—they can’t give it to the European Securities and Markets Authority (ESMA) because the European regulator isn’t ready to receive it.
How important is data management in managing all the regulatory reporting challenges?
The sheer volume of regulation is having a negative impact on firms, so the challenge is to create efficiency. It’s not a case of approaching each reporting obligation as it comes along individually because now there are too many of them. For example, non-EU asset managers have to file in every country where they’re active.
We’re seeing an evolution in data management, and how data can be managed using technology. It’s a really good time for asset managers to change the way they think about their data, and to look for a long-term way of creating efficiency.
Gone are the days when a service provider bills its clients by the hour, sends out an invoice, and then it would be paid. Now, clients are much more scrutinising. They want to know where their fees are going.
I think data management has a big part to play in the next few years. There are large companies investing a lot of time in evaluating their processes and methodologies for how they handle their data, setting up project teams to explore opportunities and looking at how data can work within their business. It’s a very pivotal time for the industry.
Are you seeing a move towards greater automation?
When you have a team of people sitting and manually inputting numbers, there is always going to be a risk of human error, and you can’t really mitigate that unless you automate. Unfortunately, some systems will replace humans, which is never nice. But, usually, they create a better environment for an existing team.
There is definitely more automation happening, and more integration of different systems. One where you source raw data once and that is organised so it can go out in multiple forms. That is real efficiency for the asset manager—and proactive too.
Has the amount of regulation had any unintended consequences, positive or negative?
If we focus on AIFMD, there have been unintended consequences. There have been funds that have been caught up in the regulation that were not supposed to be covered—arguably, they’re not even alternative investment funds.
They’re reporting and filing and completing all of their compliance provisions, creating a risk framework, but they’re actually very traditional strategies.
If they have more than €100 million in assets under management, are marketing in Europe and are not UCITS funds, they are caught by AIFMD. Long-only equity funds end up being affected, and that’s not what the regulation was intended to do. It is a shame that they have to carry that cost.
However, generally I feel very positive about global regulatory convergence. There is a lot more discussion and positive communication between the industry and regulators, and also between various regulators. Some industry stalwarts are being vocal in asking why firms have to file one form in the US and one in the UK, when both have the same information, just formatted in a different way.
If strong industry figures are willing to stand up and point out these flaws publicly, they are going to have influence. Hopefully, it will lead to more regulatory convergence and more harmonisation of global regulations.
It comes down to making things easier: some of the processes and requests for information are quite complicated, and in some cases rightly so. Funds that short or have elaborate trading methodologies should be monitored more rigorously—it should be proportionate.
