Globalisation and regulation driving industry growth
10 December 2015 New York
Image: Shutterstock
The asset servicing industry is likely to see a growth spurt driven by globalisation and regulatory change, according to an Ernst & Young (EY) report.
The report outlined six key drivers of growth: asset growth and breadth; globalisation; regulation; new products; platform extension and consolidation; and data integration.
Asset growth has been partly driven by convergence of traditional and alternative fund managers, and the resulting complex fund structures. This means asset managers are looking for more efficiency, and so service providers are responding with improved middle-office, post-trade compliance, regulatory reporting and data services.
Of those surveyed, 51 percent cited globalisation and opportunities in new markets as one of the top opportunities for growth, while 41 percent cited increased demand due to regulatory changes, and 38 percent also noted the increased demand for outsourcing.
Increased demand for alternatives, improved technology, and new product offerings were all identified as opportunities by 35 percent of respondents.
The impact of regulations emerged as the biggest threat to business, with 73 percent of respondents identifying it as a risk. About two thirds (62 percent) highlighted cost and margin pressures as a risk, while 43 percent cited competitive threats as a risk.
With regulatory change posing both risk and opportunity for respondents, the report suggested that changes to regulatory requirements have made it more difficult for service providers to make strategic decisions. Many respondents noted that the regulatory burden on both asset managers and service providers could hinder expansion.
The survey also found that regulations are leading to increased operational costs for asset managers; 77 percent of asset servicing clients are now seeking solutions for the Foreign Account Tax Compliance Act (FATCA), and 41 percent are looking for solutions related to the Alternative Investment Fund Managers Directive (AIFMD).
Generally, however, asset servicers see the advantage in offering data aggregation and reporting capabilities, particularly in order to support future growth. As many as 94 percent now offer regulatory reporting for AIFMD, while 71 percent offer risk management services, and 68 percent offer full depository services.
Another 70 percent said that they have invested in these capabilities as a result of clients’ demand for transparency and increased regulatory reporting requirements.
North America emerged as the most promising region, with 57 percent saying it offers the most revenue potential over the next five years. The report suggested that asset servicers anticipate an increase in investment in the US from overseas funds.
There is also an increased interest in Asia – cited as the region with best growth opportunity by 23 percent. The report put down to increased interest in China as investors seek market diversification, and also to the operational complexity and fragmentation in the region.
Although 20 percent believed that the largest growth opportunities are in Europe, the majority of these are based in the region, with only 10 percent of those seeing opportunities in Europe are based in the US.
Hedge funds and middle-office services were also highlighted as a leading driver of revenue growth, with 77 percent citing this as a driver. Hedge funds make up the largest proportion of asset under administration, and service providers are likely to focus growth effort on the middle office here, the report said.
Although private equity makes up just 10 percent of the total assets under administration, 51 percent of respondents highlighted it as a major growth opportunity. The report put this down to large and increasingly complex investments in this area, particularly from pension funds.
Keith Caplan, principal of EY wealth and asset management, commented: “Seismic shifts in the industry have resulted in greater demand for asset servicers’ offerings.
“Tomorrow’s winners will move from offering individual services toward an integrated service model where global platforms offer scale that appeals to a broader range of asset managers and asset owners.”
“Asset servicers that recognise today’s growth opportunities will be those that make the right investment decisions to manage the ever-increasing demand for their services.”
The report outlined six key drivers of growth: asset growth and breadth; globalisation; regulation; new products; platform extension and consolidation; and data integration.
Asset growth has been partly driven by convergence of traditional and alternative fund managers, and the resulting complex fund structures. This means asset managers are looking for more efficiency, and so service providers are responding with improved middle-office, post-trade compliance, regulatory reporting and data services.
Of those surveyed, 51 percent cited globalisation and opportunities in new markets as one of the top opportunities for growth, while 41 percent cited increased demand due to regulatory changes, and 38 percent also noted the increased demand for outsourcing.
Increased demand for alternatives, improved technology, and new product offerings were all identified as opportunities by 35 percent of respondents.
The impact of regulations emerged as the biggest threat to business, with 73 percent of respondents identifying it as a risk. About two thirds (62 percent) highlighted cost and margin pressures as a risk, while 43 percent cited competitive threats as a risk.
With regulatory change posing both risk and opportunity for respondents, the report suggested that changes to regulatory requirements have made it more difficult for service providers to make strategic decisions. Many respondents noted that the regulatory burden on both asset managers and service providers could hinder expansion.
The survey also found that regulations are leading to increased operational costs for asset managers; 77 percent of asset servicing clients are now seeking solutions for the Foreign Account Tax Compliance Act (FATCA), and 41 percent are looking for solutions related to the Alternative Investment Fund Managers Directive (AIFMD).
Generally, however, asset servicers see the advantage in offering data aggregation and reporting capabilities, particularly in order to support future growth. As many as 94 percent now offer regulatory reporting for AIFMD, while 71 percent offer risk management services, and 68 percent offer full depository services.
Another 70 percent said that they have invested in these capabilities as a result of clients’ demand for transparency and increased regulatory reporting requirements.
North America emerged as the most promising region, with 57 percent saying it offers the most revenue potential over the next five years. The report suggested that asset servicers anticipate an increase in investment in the US from overseas funds.
There is also an increased interest in Asia – cited as the region with best growth opportunity by 23 percent. The report put down to increased interest in China as investors seek market diversification, and also to the operational complexity and fragmentation in the region.
Although 20 percent believed that the largest growth opportunities are in Europe, the majority of these are based in the region, with only 10 percent of those seeing opportunities in Europe are based in the US.
Hedge funds and middle-office services were also highlighted as a leading driver of revenue growth, with 77 percent citing this as a driver. Hedge funds make up the largest proportion of asset under administration, and service providers are likely to focus growth effort on the middle office here, the report said.
Although private equity makes up just 10 percent of the total assets under administration, 51 percent of respondents highlighted it as a major growth opportunity. The report put this down to large and increasingly complex investments in this area, particularly from pension funds.
Keith Caplan, principal of EY wealth and asset management, commented: “Seismic shifts in the industry have resulted in greater demand for asset servicers’ offerings.
“Tomorrow’s winners will move from offering individual services toward an integrated service model where global platforms offer scale that appeals to a broader range of asset managers and asset owners.”
“Asset servicers that recognise today’s growth opportunities will be those that make the right investment decisions to manage the ever-increasing demand for their services.”
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