Bold mutualisation: the key to cutting costs
Riding the tidal wave of new regulation is not easy. The 4th AML directive, PRIIPS and Mifid II in particular pose major organisational challenges laced with reputational threats. The result is asset management firms investing heavily in more stringent compliance procedures, and overall product administration costs hit profitability.
There is a way out. For example, nearly €1bn could be saved each year through greater mutualisation in the Luxembourg fund industry, Europe’s leading cross-border domicile. Analysis by Deloitte has shown that know-your-customer (KYC) and due diligence procedures offer the biggest potential savings, with cash and document management, order processing, and corporate actions also ripe for reform. This is not to mention how a robust system would boost service quality while cutting the cost of errors and reconciliation.
Rather than each firm duplicating regulatory chores in-house, these could be performed centrally through a trusted central provider. Sharing, checking and screening data centrally replaces a model based on a spaghetti plate of interweaved bilateral relationships.
KYC lends itself particularly well to this model. The more partners cooperate with a utility, the more the picture about each client will be rich, reliable, and up-to-date. Several KYC utilities have emerged across the financial sector, but all fall short of realising their potential. None has achieved widespread acceptance and regulators do not as yet allow KYC checks to be outsourced.
There is no KYC utility specifically designed for the asset management industry, but moves are underway. Fundsquare is working with industry players to understand needs and gauge options. Given Luxembourg’s unique role as a cross border service provider there is potential to make an important breakthrough.
The major IT and organisational challenges posed by Mifid II could also be eased by such a mutualised approach. Again, most fund companies are addressing this regulation using numerous point-to-point connections and non-standardised data. The risk is that these systems will be difficult to manage, prone to error, and thus costly.
A Mifid II utility could streamline procedures and reporting by sharing key information. This includes product investment strategies, the “suitability” of investors for complex funds, costs and fees embedded in each product, and changes in asset ownership. A hub and spoke model would facilitate seamless communication with distributors and regulators in multiple jurisdictions.
The prize for building these data hubs is a more resilient, efficiently regulated financial sector offering better quality services at lower cost. Bold, decisive action is required by the industry, regulators and legislators. There is a precedent, as the financial industry came together to found CCLUX (now Fundsquare) in Luxembourg in the early 1990s. If all stakeholders can take such entrepreneurial steps again, the benefits to customers and the wider economy would be significant.
Fundsquare will be exhibiting at FundForum International in Berlin, 6 - 8 June 2016, and Olivier Portenseigne, Managing Director of Fundsquare, will also be speaking in the Business Leaders Forum.