The transfer agency landscape is shifting, and in 2015, it will be those willing to adapt that will survive. Industry experts discuss the challenges ahead
What is your focus for 2015?
Laurent Majchrzak: Our main focus in 2015 is anti-money-laundering (AML) and know your customer (KYC), which, for several years now, financial regulators have been taking extremely seriously, closely scrutinising long-form accounts, fully analysing auditors’ comments, and putting more pressure on management companies and boards.
If there are any inconsistencies in AML or KYC dossiers, the regulator has the power to take punitive measures. This increases the need for rigorous controls on management procedures for investor account documentation. As providers, we either accept inefficiencies as a natural part of doing business or we invest in solutions that provide more accurate controls that seek perfection. CACEIS will bring higher-than-benchmark AML and KYC services to clients by the end of 2015, giving them a significant competitive advantage.
Another focus is the modernisation of our reporting service for investors and distributors, combining a traditional ‘generate and send’ reporting service with newer internet-based solutions, which are a key part of our plan to facilitate ‘direct orders’.
The Markets in Financial Instruments Directive (MiFID) II and other regulatory developments pose a serious threat to some European countries’ distribution models by limiting funds’ ability to remunerate distributers for bringing business, effectively removing the incentive to sell a manager’s products. We are looking to develop new, internet-based solutions, so investors can directly open accounts in an automated manner and subscribe into funds, which reduces long-term administrative costs and avoids passing via an intermediary like a distributer.
Once the implementation of our new transfer agency platform is completed this year, it will be more robust, enabling us both to make productivity gains and enhance services. In the current market, where there is pressure to reduce costs, increasing automation rates is one of the only viable avenues for lowering costs.
Adapting to new regulatory demands is also a major 2015 focus. Phase one of the Foreign Account Tax Compliance Act (FATCA) is complete, phases two and three are not far off, and Luxembourg’s new ‘Automatic Exchange of Information’ threatens a similar workload to FATCA.
Finally, we will focus on facilitating alternative investment fund and UCITS registration in target markets to simplify clients’ distribution efforts.
Steve Fice: Advances in technology continue to influence the transfer agency sector. There’s a growing demand for improved online solutions that permit investors to view, service and trade on their accounts in real-time from mobile devices on a 24/7 basis. We have seen significant interest over the last 12 months in our retail and distributor portals, and we expect this trend to continue.
The portals facilitate user self-service, while providing third-party administrators and fund managers with an enhanced service offering and a significant competitive advantage.
We are also seeing further demand for automated settlement and dealing. Clients are under constant pressure to improve efficiency and reduce risk while managing costs. Increased use of straight-through processing (STP) is one mechanism for eliminating manual and time-consuming administrative processes, and fund management companies are increasingly opting for full automation to include settlement across the transaction processing cycle.
Ghassan Hakim: With the increasing demand to stay ahead of the curve for all of the changes faced by our industry, which include a raft of complicated tax and regulatory changes, increasingly complex investment fund structures and global distribution models, transfer agents are in the process of transitioning from a traditional cost centre to a more added value service.
Our role as the transfer agency software solution provider is to keep designing and implementing solutions that allow our clients to meet these increased demands cost efficiently, while remaining business agile and operationally efficient.
In such an environment it is easy to see why the opportunity to utilise the benefits of a comprehensive single transfer agency solution that is capable of servicing the cross-border distribution of an entire asset manager’s product range, across multiple jurisdictions, with a single investor view, is very attractive.
How are regulations around the world affecting investor reporting? What impact is regulation having on workload and costs?
Hakim: There are many aspects to this topic but one clear and overwhelming feature is increased regulation globally that is not necessarily in complete synchronisation across jurisdictions. Asset managers, fund promoters, administrators and service providers are constantly being asked to provide investors with frequent, simple to understand communications that are fully transparent.
Other than language, each jurisdiction has introduced various nuances to these goals that the underlying systems must take in to account. Having multiple transfer agents and/or separate investor and client reporting systems makes keeping up with these changes a lot more costly than having a global, centralised, transfer agency system that incorporates the investor reporting requirements by being flexible, customisable, parameterised and quick to change.
Fice: International regulatory initiatives such as FATCA continue to have a major impact on the transfer agency industry and the software providers that support it. Systems and processes need constant updating and refreshing to keep up to date with the ever-changing legislation requirements.
The combined impact of global and local regulations such as the client asset rules affect providers by imposing ever-increasing costs for compliance from market to market. This creates a more complex ongoing administration and support burden. Transfer agency technology platforms must be flexible and able to address diverse requirements across multiple regions.
Majchrzak: This is perhaps the biggest question our industry is facing and one that is still evolving as new obligations arrive. There is regulatory reporting in the jurisdiction where a fund is domiciled, reporting on the UCITS fund’s registration status (reports themselves are harmonised in Europe but communication protocols with financial authorities are not), new reporting rules for alternative investment funds, and finally, the arrival of FATCA and the Automatic Exchange of Information, both of which are a huge drain on resources.
For the provider, the costs of adapting to these regulations is immense, and we have a limited capacity to pass costs to clients that are naturally unwilling to take them on. The lack of harmonisation forces us to absorb the huge costs. With no initiative from the EU to create a central authority that can receive and redistribute reports to local regulatory and tax authorities in a standard format and protocol, providers are forced to adapt to the requirements of every single authority, which is inefficient and raises additional distribution costs.
Financial authorities tell providers to simplify distribution and reduce associated costs while they keep introducing new obligations that raise indirect distribution costs.
What operational changes are you implementing and can you enforce changes fast enough to meet regulatory demands?
Fice: For third-party agents and fund managers, understanding the impact that regulations will have on their business and investor base, and the overhead required to support and implement these, continue to be a priority. We discuss with clients how the regulations should be supported and the changes that need to be made to reflect their business and operating models.
As our solutions cover a range of geographies and regulatory environments, the approach we have taken wherever possible is to cover the enhancements required on a syndicated basis across our client base. Clients have also been able to benefit from shared product management, regulatory tracking and business analysis skills across all our transfer agency solutions.
Majchrzak: We have to meet these regulatory obligations. No credible provider can let a client down by missing an implementation deadline. We take this extremely seriously, but sometimes it is the clients who are unable to keep up. Providers must be ready but the obligations lie with the fund and despite intensive communication campaigns, it’s an uphill struggle to get clients to act on time. We are commercially obliged to develop the services and it’s up to a client whether to engage our services or not. For FATCA and the Key Investor Information Document, we would have preferred to receive a definitive decision from clients in good time, but this was not always the case.
Hakim: At Riva, our goal from the time the system was initially conceptualised was not only to offer a global solution across jurisdictions and product types, but also to give the end users a lot of control and flexibility on how the system should operate via a central static data engine. As a result of this model, our Riva Transfer Agent solution offers a fast time-to-market for all such changes, many of which can be adopted by the end user without requiring vendor intervention.
What will harmonisation efforts such as T2S in Europe and the Asian fund passport initiatives do to the complexity of transfer agency? What will the business effects be?
Majchrzak: Target2-Securities (T2S) brings reduced settlement times (Luxembourg players still have to agree on the new settlement date) but money-market funds already use ‘same day’ settlement so it’s just an evolution of the marketplace. The Luxembourg central securities depository (CSD)-related initiatives to simplify clearing for funds, facilitate delivery of units from a register to a CSD and inter-CSD exchanges are all worthwhile initiatives but nothing revolutionary, so long as solutions cannot support order routing from the participant.
The European Commission cannot launch the truly revolutionary initiative of establishing a global European CSD, possibly because of conflicts of interest with CSDs like Clearstream and Euroclear. A global European CSD could be connected to all the other CSDs, permitting settlement and delivery of fund units after a transaction, and order taking, where members place orders directly with the CSD, similar to the Euroclear France model.
A global European platform would deliver units when the investor buys them and also receive orders from the platform. However, we are looking at T2S, which wasn’t initially designed for funds, but into which funds have been included. It’s not a project that is focused on distribution, it’s a project with consequences for distribution. Fund distribution is suffering from the lack of specific initiatives designed to meet the public demands to simplify and reduce the costs of fund distribution.
The Asian passport, whether it’s the Association of South East Asian Nations passport or the Asia Regional Fund Passport, would favour the jurisdiction of Singapore as the location of choice for a transfer agent and could see Singapore rival Hong Kong as an international fund distribution hub. However, for Hong Kong-based transfer agents, growth in the number and scope of mutual fund recognition initiatives, like that which is under discussion between Hong Kong and China, would be a very positive development.
Fice: As we have seen with UCITS IV, different countries and markets have their own nuances, which provide barriers to harmonisation above and beyond funds regulation itself. Key to overcoming these challenges is technology that allows changes to be quickly made, especially when dealing with multiple domiciles, each with their own processing and settlement model.
Undoubtedly, anything that reduces the risk and the overnight funding is good for the market and makes it faster and more efficient. The migration to T+2 will increase the automation of operational processes across firms. Efficient, STP-enabled technology platforms will offer real advantages as institutions revisit their current asset servicing business model.
Hakim: For the most part, these harmonisation efforts will not require a direct change to the way transfer agency systems operate, as the impact is more on legal agreements, trading systems and distribution arrangements. However, there will be pressure on transfer agency systems to provide more timely information to a broader audience and to ensure that all relevant regulatory mandates are accounted for.
Once again, moving towards a global transfer agency approach is the most effective way to address these growing and complex demands while maintaining control over increased cost of compliance.
Having multiple systems across jurisdictions would require duplicate efforts and more interfaces between them. Such changes extend beyond the systems infrastructure and in to the business servicing model in terms of responding to more complex investor queries, transactions and reporting needs.
How is transfer agency evolving to accommodate the changing environment? What adaptations have you had to undergo, if any?
Fice: Those financial institutions that can achieve the right balance between regulatory compliance and service innovation will be well placed to capitalise on growth opportunities. Crucial to success will be efficient and agile technology solutions that deliver real value and a long-term strategic advantage.
One of the key challenges facing transfer agency is the increasing data-driven demands from regulators, clients and investors. Fund managers and third-party administrators are turning to surround technology solutions to provide access to accurate, real-time data and management information reporting. Data warehouse solutions that break down isolated silos and consolidate data from multiple back-office systems are increasingly in demand.
Core transfer agency platforms must also be able to support institutional and retail business for cross-border and domestic funds with the growing trend towards distribution platforms.
Hakim: Transfer agents, globally, have seen a dramatic increase in their costs to operate and provide effective and efficient services to shareholders and other impacted entities. As a result, many organisations have, over the past several years, had to revisit and alter their business models in order to continuously adapt to the changing environment around them. These efforts are continuing to date, and are not likely to stop in the near future.
As a result of these added pressures, we are seeing a number of organisations re-evaluating their service offering and some have already either exited this space or have indicated their intention to do so.
This changing landscape brings opportunities with it for new players to enter the space and for smaller providers to expand, but these players can only be successful if they have an underlying global transfer agency system to support a cost effective and competitive business model.
Majchrzak: Costs in general are higher but two types of costs must be considered: Internal costs and costs that can be passed on to clients. Higher costs obviously come from adapting systems, creation of new reports and new processes.
In the past, most players considered transfer agency costs as ‘out-of-pocket’ expenses but today, as costs have sky-rocketed, the industry says it can no longer price transfer agency activities at a flat rate when there is market pressure to reduce fees across the board, including in transfer agency. It becomes extremely hard to price these distribution activities at a flat rate without taking into consideration the internal costs. It also weakens the viability of the transfer agent-only offer because, in the absence of other pockets of profitability to subsidise it, you have little choice but to adapt by increasing prices.
Asset managers have been used to transfer agency being a low-cost service, but the economic reality is that the transfer agent can no longer realistically price its services without taking into account the increase in service complexity. The progress that transfer agents are making in reducing production costs has been completely offset by regulatory initiatives which keep adding layers of complexity and increasing costs. Transfer agents have to adapt or quit the business.
