Embracing technological innovation to transform asset management
Rather than taking a short-term reactive approach to coping with regulatory change, and the inevitable reporting/data management task that comes with it, asset managers would be best advised to step back and think more long-term.
That's the view of Lee Godfrey (pictured), CEO of KNEIP, one of the industry's leading legal and regulatory reporting specialists.
In many respects the financial services industry, specifically asset management, is a little bit behind the technological revolution. There has been a lot of media coverage on the passive versus active debate and regardless of where one stands on the issue, the overall argument is putting fee pressure on both passive and active fund managers.
MiFID II will only add to the pressure by making funds more transparent with respect to transaction costs.
All asset managers and intermediaries are therefore under pressure to do things more efficiently. One way to do this is through technological innovation.
Ultimately, whatever the regulation, there is only so much data one can manage for their fund(s). From PRIIPs and MiFID II, due to go live in January 2018, to compiling KIID documents under the UCITS regime or reporting Annex IV, the same data is used many different times. Therefore, if asset managers use a different supplier every time a new regulation comes along, all they end up doing is multiplying that data in the marketplace.
"It may be 300 fields, but it is rarely `Big Data'," says Godfrey. "You just need to make sure you have your data governance right. Start by acknowledging that the product specialist owns one set of data, the accounting team owns another set of data, the legal team owns all the registration data around the fund and so on.
"As long as you have a clear view of who owns the data, you don't need to replicate it internally. Just ensure you have the governance framework in place."
The Wild West needs a sheriff
As Godfrey is quick to state, if there were no problems in the Wild West there would be no need for a sheriff.
"If everyone behaved, the regulators wouldn't be coming down on distribution oversight and product governance (under MiFID II). Firms need to step back and think about how to react to it.
"That's what should be driving changes in business and changes in the way people use technology. In most instances, asset managers are still doing the same old thing. They hire consultants to explain to them what the regulations are. They hire another consultant to implement an RFP, then another consultant to choose the winner of the RFP, and yet another to manage the whole integration process."
This myopic approach not only takes months to implement a piecemeal solution, it perpetuates complexity. Ideally, fund managers should step back, see the wood from the trees and think, `I already have a clear view of where all my data sits and I have an understanding of what output is required by the regulator'.
The financial industry has always had technology as its backbone, it just hasn't evolved as quickly as other industries such as telecoms or e-commerce.
Five modules for MiFID II
That is precisely what KNEIP is doing with the digital platform, with Godfrey confirming that a set of five modules are being onboarded to help clients with the upcoming MiFID II regulations.
The first module is the managing of Target Market data. This is a whole set of fields required by the distribution network to make sure the distribution partner is selling the right product to the right people.
"That is a set of mostly static data fields that we've been handling for years, sending to the likes of Bloomberg, Morningstar, etc. For us, this was therefore an extension of what we were already doing," adding that the same is true of the second module, which is designed to enable clients to manage their distribution network.
The third module is for transaction costs and charges. It's much the same as one needs for PRIIPs so rather than creating two distinct products the module KNEIP has created works for both.
"The fourth module is designed to break down the shareholder register and identify who the distributors are that might be hidden behind a nominee account structure. That's something new that the market doesn't have. The fifth module is for making sure you are paying the right fees to the right people.
`Our vision is one where we want to transform the financial services industry to better serve investors," says Godfrey.
To fail is to gain experience
One aspect of the business culture that needs to change, not just in Luxembourg but Europe as a whole, is more open-mindedness towards failing. If you fail you are labelled with that for a long time, says Godfrey, whereas in Silicon Valley you are patted on the back and encouraged to move on to the next idea. Failure builds experience. And experience can lead to breakthroughs.
People shouldn't be afraid to fail.
"Within KNEIP we have installed that belief system," Godfrey emphasises. "Everyone is able to come to up with a story/idea and we provide funding to explore that idea. If they've put their energy into it and tried their best but the idea fails, fine. Let's move on and try another. If you don't support such a culture, nobody will seek to change and you will stagnate."
In that respect, KNEIP lives and breathes innovation. Earlier this year, the firm unveiled its new digital platform as part of its long-term digital transformation strategy. Every 90 days, a new product is developed for the platform to meet a specific need for its clients. Back in June this year, the first of these products was a revolutionary fund registration tool to make managers streamline how they sell their funds globally.
"We have digital ambassadors who volunteer to step up and try out ideas. It is highly motivational," says Godfrey. Google gives people days off to go and think. That's smart. Asset managers might want to try a similar approach because technology alone cannot transform a business; the entire internal culture and mindset has to want to change too.
Drag and drop funds for registration
Discussing the fund registration tool, Godfrey draws analogy to the map one sees on an airline that shows all the different routes the airline takes across the globe.
If someone is thinking of registering their Luxembourg fund in Germany, using the registration tool all they would need to do is drag and drop the fund into Germany. The tool has built in all the rules and regulations one would have previously relied upon their intermediaries to deal with. It simply compiles the data, the documentation and automatically sends the fund registration details to BaFin, the German regulator.
"You can see where your fund is registered, where is it distributed and where is it sold. All of that data gives you a picture of how your funds are being used in the market. Because it's all on the same digital platform, asset managers can start looking at data in a sensible way. They can turn a regulatory cost into, potentially, distribution enablement," concludes Godfrey.