Asia
19 February 2014
Asia has been able to jump straight from manual processing to an electronically automated transaction process, but Asian distributors must be incentivised to move from fax to message, says a panel of experts
Image: Shutterstock
How would you differentiate transfer services in Europe from Asia or America, and do you adapt your business regionally?
Jonathan Willis: On the one hand, we differentiate our services regionally but on the other hand have a global approach through our global service model to the way our business works.
It’s about economies of scale. The administration activities between Asia Pacific (APAC) and Europe, Middle East and Africa (EMEA) use the same base technologies. We operate a global model and layer the clients’ local needs on top to ensure that they get a service, which is scaled globally with the essence of a localised and regionally compliant service. We focus on our understanding of local market practices, regulations, distributors and history to support our clients in rapid entry and MI provision.
Our discussions indicate that rather than wanting differentiated service models region by region, there is a good level of matching services that the distributor populations are looking for—particularly those who operate in multiple regions.
Paul Roberts: The key is to recognise the differing market structures that exist across each region. European markets, although more aligned than those in Asia, still face the challenge of being fragmented and less standardised than America. The continuing drive of regulation throughout Europe is slowly moving us in the right direction and aligning markets, however, issues still exist in local fund ranges with regards to reporting, taxation, language support and cash handling.
Labour costs and the pressures for accuracy and effective control have meant that high levels of automation are firmly established in the US and we see this trend growing strongly through Europe and in the early stages of progressing into Asia.
Different distribution models also exist in a number of countries. Transfer agency providers need to adapt and ensure we are well placed to support our clients target distribution channels. Distribution in continental Europe is dominated by the bancassurers (insurance provided by a bank), whereas UK retail investors are moving towards platforms with sub account models, similar to that of the US and Australia.
Yvonne Hurst: Calastone is a global company, and our transaction network is fully interoperable across domiciles. The priority is to connect companies both within and across nation states, so in that sense we don’t differentiate our level of service. Instead, we ensure that no matter what a company’s own internal technology infrastructure or preferred messaging formats, standards or protocols, we can connect them to their counterparties, without the need for them to change their own structures. We do this via our global transaction network, which means we can connect anytime, anyplace, anywhere.
When looking at fund transactions, one can see that in Europe the transfer agent model is quite mature, similar to that in the US. Asia is less established but growing fast, particularly in terms of the number of transactions being processed. To a great extent Asia has been able to jump straight from manual processing to an electronically automated transaction process, leapfrogging any earlier technologies previously available, which were not fully interoperable.
There are noticeable differences between Europe and Asia. Over the years, European clients have demanded more and more bespoke services and generally all work activities are based locally, which adds cost if charged back to the client. While in Asia, several of the transfer agents offer sub-transfer agency registers, where the funds are European yet distributed into Asia. In the mature markets we’re certainly seeing a consolidation of IT platforms.
Ghassan Hakim: The US has a largely retail and primarily domestic transfer agency operating model, with limited multi-currency and multi-lingual capabilities when compared with other major fund centres in the world. Operating in one single regulatory environment has allowed for the market-wide adoption of standardised practices, allowing the industry to have a standard platform for trading, clearing and settlement.
The European market by contrast is different because it has traditionally had to cater for a multitude of operating models, taxation regimes, languages and currencies in multiple jurisdictions, distributing funds into multiple individual markets. Although there have been significant steps taken by the EU to try and consolidate this fragmented market, there still remains much local legislation to contend with.
Although less established, Asia is similar to Europe in that it is comprised of a multitude of distinct markets that are individually defined by their own particular distribution models and regulatory environments.
In order to appropriately service the respective needs of each region, transfer agents need to ensure that their underlying technologies are adequately equipped to move with the times.
Aubrey Nestor: Bravura’s clients are predominantly the European based arms of fund management companies and third party administrators which distribute their funds globally. The majority of this distribution is conducted cross-border from the European offshore markets of Luxembourg and Dublin with a smaller proportion based upon locally domiciled funds in Asian markets.
A substantial part of the cross-border distribution into the North American market is automated via the National Securities Clearing Corporation (NSCC) platform with similar automation into Canada via the Canadian FundSERV platform beginning to gain traction. Bravura provides support for this using our Babel STP messaging solution, which supports automated trading via both these platforms.
A significant amount of non-STP business is also still conducted with America and for this our clients use remote service centres situated in the US and operated either by their own staff or by partner companies. Bravura’s Rufus transfer agency platform supports a remote service centre feature, which permits trades to be entered directly into the central transfer agency system from geographically distant service centres that can only access their own partitioned subset of the database to service their own local investors.
Cross-border distribution into the Asian markets is much less automated and is still heavily reliant on faxes. Our clients do, however, use the Rufus remote service centre feature to allow them to locate their front line transfer agency administration staff into geographic locations which are in a similar time-zone to the markets they are distributing into—Hong Kong, Singapore and Taiwan being the most popular locations.
What are the challenges in increasing automation in the region?
Nestor: Intra-European business is now achieving quite high levels of automation for trading and, to a lesser extent, settlement. A significant level of European funds business is, however, transacted with markets outside of Europe and some of these markets, particularly within Asia, are not making the investment to move beyond fax communication. This is holding back automation. The challenge is to incentivise those Asian distributors to move from fax to message or file based communication by showing the advantages that will accrue to them.
These include faster processing and response, greatly reduced risk of processing error, automated machine-readable confirmation messages and automated trade side postings into STP settlement systems. This is likely to be a long-term educational process but it could accelerate quite quickly once the tipping point is reached within a particular national market. It is also likely that progress will vary on a country-by-country basis.
Many larger European transfer agencies have already developed STP trading and settlement linkage with NSCC for distribution in North America, using connectivity tools such as Bravura’s Babel. We are also starting to see increasing interest for our newly developed Canadian FundSERV Babel module.
Automation of distribution of European funds into the South American markets is in a much more fledgling state. It is hoped that these markets will be less attached to the fax than their Asian counterparts and will move to embrace standards-based STP from the outset.
Willis: One of the greatest challenges in the region is that different jurisdictions have different platforms with different proprietary message formats. We have recognised the issues this creates and using both our own custody messaging solutions combined with Babel, we have adopted a strategy that enables platform plug in for deal execution and settlement at speed.
Additionally, we have been working with key platform providers, eg, Calastone to identify the gaps in service, why platforms are not used as extensively as they might be and plugging those gaps. We have seen early success, increasing STP rates in the UK alone by circa 5 percent in the last two quarters of 2013.
Hakim: Increasing automation where possible is clearly an attractive prospect for transfer agents due to the decrease in operating costs and increased efficiencies that are traditionally associated with automation.
Automation levels continue to vary from country to country but within markets that have invested a considerable amount of time, effort and money in automated solutions, fund providers, distributors and third party administrators are now reaping the benefits where possible. Europe has reached a position where there are useful levels of automation, and the standardisation of processes has allowed automated deal processing in particular to flourish, resulting in reduced operational costs and lower processing error rates but there is still a way to go and there is still a lot more STP investment needed, particularly for alternative investments.
Throughout the industry, there are increased calls for a global transfer agency platform that can service multiple product types, replacing multiple legacy systems, each focused on a particular investment vehicle. The current landscape of multiple systems carries higher cost, redundancies, training challenges, and inefficiencies in disaster recovery plans and so much more. Software providers and IT departments need to refrain from ‘band-aid’ solutions like developing surround systems to their legacy platforms and start focusing on developing an integrated single solution.
Hurst: Once a company decides to automate, the process is rapid and the advantages can be significant in terms of increasing efficiency and lowering costs. The hardest challenge is making that initial decision. The decision might be delayed due to a lack of information on how to make the changes, or concerns over whether adopting any new technology will require an upfront investment. But it is much easier than perhaps some imagine, and there are no unexpected hurdles in the transition. Calastone can get a customer connected to their global transaction network very quickly, and this without the need for internal technology changes. The pace of adopting automation is accelerating, as companies recognise the benefits.
Some of the challenges tend to be the upfront cost in terms of legal requirements, any charges levied by the transfer agent, transfer agency appetite due to lower revenues—especially if outsourced to lower labour markets, or it might be that there are complicated staffing re-allocation considerations. Automation is also sometimes overlooked when a company’s employment strategies have to consider domestic labour laws and social policies. But there is another reason, perhaps as important as any mentioned, that some transfer agents are still not quite ready to demand an end to the fax. I think it’s time they probably voiced their concerns more forcibly.
Roberts: Institutional trading volumes continue to rise in Europe and we are seeing higher levels of STP now than we ever have. Issues arise as new products continue to enter each market leaving a legacy of historic products and associated operational processes, hindering the take up for retail automation. New regulations and legislation, particularly around know your customer/anti money laundering requirements present additional challenges to comply with and keep the process as smooth as it can be for our clients, their distributors and the end investor.
Extending automation beyond buys and sells to transfers present a new set of challenges.
What are the latest developments to affect the transfer agency industry?
Roberts: Asset managers and distributors continue to demand consolidated platforms to address their record-keeping needs. In addition, these capabilities need to be available across a broad spectrum of products on a regional or global basis.
Changes to distribution channels in Europe, in particular the rise of direct-to-consumer platforms for retail investors and of new technologies, means the customer can now rightly be put centre stage. It is vitally important that the customer, be it an end investor or financial institution, has the best possible experience when dealing with the transfer agency provider. Regulations also continue to create their own ongoing pressures.
Hurst: There are a number of regulations that have impacted upon decision making of transfer agents. For example the continued regulatory obligations such as the Retail Distribution Review (RDR), The Foreign Account Tax Compliance Act (FATCA), and know your customer requirements regarding identification. All this has all increased the amount of work involved for transfer agents on the transaction side. Other impacts include the movement of clients, and several transfer agents are looking at the strategic importance of offering the service.
Global custodians will have to consider in the future whether having an in-house transfer agency service is going to be profitable or a necessary evil in order to win more value added services from a strategic client. Clients are rightly demanding more efficiency, more globalisation and more consolidation from their transfer agents and be looking for them to offer wider distribution. The focus is clearly greater efficiency and better service. Several transfer agents are trying to move to one global IT solution, to lower cost and to show greater flexibility, in terms of business continuity planning and disaster recovery. The transfer agency is pretty commoditised and it doesn’t make sense to run multiple platforms.
Nestor:Regulation continues to have a major impact on the transfer agency industry and the software providers that support it. The impact is twofold. Firstly there is an almost constant need for system and process enhancement to support new regulatory requirements. This creates a more complex ongoing administration and support burden. Secondly, there is its potential impact on the funds market as a whole eg, the UK RDR legislation may have a radical effect on which kind of products people buy and FATCA may have a significant impact on which fund domiciles people invest into. It may take some time to see whether these impacts are beneficial or disadvantageous to the market.
Technology advances are also changing the transfer agency market. We’ve seen year-on-year increases in processing power and screen resolution for devices such as smartphones and tablets, together with the mass market penetration achieved by their inversely rapid decrease in cost.
This is driving demand for systems that permit users to view, service and trade on their accounts from these mobile devices on a 24/7 basis. There is significant interest in systems which facilitate this kind of ‘self-service’ by investors, both because they deliver a perceived increase in service in the eyes of the investor but also because ‘self-service’ is the ultimate form of admin free STP processing for the transfer agent.
Hakim: Faced with increasing demand to stay ahead of the curve for all of the impending changes faced by our industry, transfer agencies whether internal or outsourced, are in the process of transitioning from a traditional cost centre to a more added value service.
Changes faced by the industry include a raft of complicated tax changes, increasingly complex investment fund structures and global distribution models, and a seemingly unstoppable wave of new regulations, all of which are putting increased pressures on transfer agents.
Our role, as the solution provider, is to keep designing and implementing solutions that allow our clients to meet these increased demands cost efficiently whilst 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 TA solution capable of servicing the cross-border distribution of multiple product types across multiple jurisdictions with a single investor view is very attractive.
Willis: A combination of factors including regulatory, changing economic dynamics around the globe and the fundamental shift in use of technology particularly over the past five to 10 years means that transfer agency is changing. Transfer agency is the point of contact with the end customer—be they distributor, advisor or retail investor. As their habits change, so must our services to support their needs.
The biggest developments are around regulatory and market change. Particularly pertinent to this are client money changes as well as tax legislation. We have a dedicated EMEA regulatory and market change team who form house views via our industry knowledge and interaction to determine the best approach to operational change, ensuring that our clients are fully versed in the changes and their implications.
Do you think it is advantageous to outsource transfer agency functions to cheaper labour markets?
Hakim: The correct answer to this question is the development of a global sourcing business model as the solution for an effective transfer agency. It would be wrong to only factor cheaper labour markets as the basis of where functions are performed. The priority for any service provider is to ensure that they have efficient procedures and processes in place, and a team that possess the required skills and expertise to deliver a high quality of service.
A comprehensive global sourcing model factors in client facing functions versus back-office functions within the context of global and regional presence, the ability to service clients seamlessly through the various time zones and have strong ‘live’ disaster recovery centres. For example, a global sourcing model allows a transfer agent to shift service functions on moment’s notice to address local disruptions, whether climate induced or political.
Technology today already supports global sourcing models with web-enabled systems, global imaging and workflow solutions, advanced audio and video communication tools and growing social media.
Nestor: Offshoring administration can be very advantageous if done properly but it is also easy to get it disastrously wrong. It depends initially on a very highly committed management approach to establishing the offshore office(s), hiring the right calibre of local staff (in particular the local management team) and getting them trained and equipped. Being able to second experienced central transfer agency staff out to the offshore offices for training and familiarisation work is also crucial.
From the outset and on an on-going basis it is essential to get top down management buy-in to making the remote administration approach work and building trust. A senior manager from one of our large transfer agency clients which has successfully made offshore administration work for them said that the tipping point came when they stopped asking, “can we trust the remote admin team to handle this activity?” and started asking, “why can’t we trust the remote admin team to handle this activity?” This presumption of competence is vital.
Another key success factor is having systems that can be deployed globally and also which support global work distribution. Bravura’s Rufus transfer agency system has a very tightly integrated image and workflow tool that has permitted one of our major transfer agency clients to implement an offshore administration facility. It can now seamlessly and easily move work items across the globe and back again.
Hurst: With the level of innovation today I think companies should look at automation and streamlining processes rather than outsourcing to cheaper locations, which is initially very costly anyway due to project costs, training and implementation, client consent, staff redundancy or the costs of training staff to use new technology systems. Outsourcing highly manual tasks to cheaper locations can be a very shortsighted strategy, especially when the industry is rightly demanding ever higher quality when it comes to efficiency in technology.
Willis: It can be advantageous providing you are clear about the types of services being offshore. For example, we retain our client contact function in EMEA but we offshore activities like deal processing and other functions to our office in India. The benefit to us of places like Pune is that we are able to get extremely highly educated people working in administrative functions providing our clients with high quality services. Outsourcing is also becoming popular nearer to home, such as Poland and some of the eastern European states.
Cultures, skill sets and working practices are important considerations. Lastly, you need to ensure you have really strong business continuity planning so that in the event of a crisis you can bring your function back without significant impact on service provision.
Roberts: Offshoring certain non-customer facing functions to alternative labour markets definitely has some advantages, but responsibility and control must not move. At IFDS, we have been very pleased with the high quality of work, the consistency and the enthusiasm of our offshore employees. Importantly, it is not simply a case of ‘throwing work over the fence’.
We are fully engaged on a daily basis with our offshore senior management team and ensure that the whole operation makes everyone feel part of a single, unified team. This, however, is not a quick-win process. We have employed permanent, locally based management at our Indian operation for several years. It has taken us ten years of relationship building and hard work to get us to the strong position we see ourselves in today.
Clients are looking to merge their funds located in different domiciles. How will consolidation of this kind affect the industry?
Hurst: It will probably lead to consolidation of the transfer agencies, and perhaps only the strongest will survive. Regulations will continue to create huge demands on the industry, which will either lead to further investment in the industry, or it may lead to the development of more manual processes which will only serve to increase the risk premium. Transfer agency tariffs will need to factor all work involved in meeting new regulations and reporting. Gone are the days of the price wars, which will only be good for the industry. Consolidation might also lead to a global standardised pricing structure. If that happens and the margins on tariff differentiation between the transfer agents declines, then investors may look more heavily at the differences in service element.
Willis: Many fund managers are looking beyond traditional markets for new growth but they do not wish to have funds per jurisdiction, multiple service providers and multiple service models. The UCITS regulations have facilitated fund sales across domiciles and the end customers require different and modern servicing mechanisms. Our solutions facilitate the use of UCITS legislation across multiple jurisdictions using a consistent service model, supported by solutions and products tailored for use by particular investor types.
The role of the transfer agency is expanding from simply being an order taker to becoming a distribution enabler. Our new global operating model covers EMEA and APAC, reflecting the importance of emerging markets as a source of growth, providing a consistent service around the globe. Clients need a service that facilitates the provision of funds in multiple jurisdictions, which we provide using master feeder regulations through the use of the single database. Every other transfer agency model has been built around the region. However, the systems need to talk to each other. Rather than being about reporting back from a single account, we provide a single database to give a fully consolidated view.
As well as facilitating use of UCITS funds via a single model in multi-jurisdictions, the transfer agency is also moving heavily into areas of distribution support such as relationship management, introductions, information delivery and we expect to develop these areas further in the coming few years.
Hakim: Like many other industries the fund industry is already consolidating; with mergers and acquisitions regularly making headlines.
The main impact of fund consolidation has been felt by those transfer agents that do not have a global transfer agency software platform. Transfer agents who have not adopted a global platform are not in a position to service their clients across multiple jurisdictions, and they are unable to cater for the complex distribution models; as a result of this, it is the single market domestic transfer agents and their software providers that have been the most adversely affected.
The advantage firmly rests with transfer agents able to provide their clients with the international coverage that is required, and that have the experience of supporting distribution into multiple jurisdictions. Our flagship product, Riva TA, is such a global solution. Riva TA deploys to multiple jurisdictions including all cross border and offshore jurisdictions, is neither limited to one physical location nor to one jurisdiction or fund structure and incorporates the different languages, time zones, currencies and the specific parameters associated with each, including the required regulatory and tax rules relevant to each jurisdiction.
Nestor: The UCITS IV legislation permits a fund manager to have a single range of funds domiciled in any EU country but to freely market those funds into any other EU country. This can be directly or via local domestic feeder funds.
In the past the difficulties of cross border marketing within the EU led many fund managers to create a separate set of very similar or even duplicate fund ranges for each retail domestic EU country that they wished to sell into. For these managers the prospect of collapsing all of their national domestic fund ranges into one central fund range might be very appealing.
This will allow them to shed the cost of duplicating the effort of portfolio management, fund accounting and custody for these funds. Interestingly transfer agency is one area where they won’t make as significant a saving because they will still (hopefully) be performing the same number of investor transactions. They will save the duplication of applying prices and running dividend distributions across multiple fund ranges.
There are still some tax issues regarding the required fund mergers and the treatment of feeder funds, which are holding back widespread usage of this enabling legislation. Once they are ironed out the companies who adopt this approach are likely to enjoy a significantly lower cost base than similar companies who do not.
If a single central transfer agency system is to be used then it is vital that this system has full multi-currency and multilingual support. It must also be flexible enough to handle differences in local domestic regulations and market practices (eg, different consumer protection rules, different manual/automated anti-money laundering checking approaches and different tax incentivised products).
Roberts: Fewer fund ranges should drive down cost and so deliver benefit for the investor. This also causes less revenue for transfer agents and will continue the concentration in the transfer agency industry. Transfer agency cannot be done in half measures; it needs a minimum scale.
How is European regulation affecting the sector?
Hurst: Regulation has many known benefits, but one of the less well received implications recently has been the impact it has had on driving up costs for both the fund provider and the transfer agent. New regulations mentioned above have been, in part, expensive to implement. Indeed I go as far in saying that it may prompt the end of the ‘in house’ transfer agency solution. Perhaps we will see service providers sharing the costs across their client base, to make the costs more palatable.
Nestor: In recent years there have been a number of regulatory initiatives, which have had a significant impact on the European transfer agency market. These included EU regulations (eg, UCITS IV), domestic national regulations (eg, RDR) and US regulations (eg, FATCA). This has led to a period of a year or two where the industry has focused its development budget very much on compliance.
Whilst there have subsequently been a significant number of further new regulations the thrust of these has been more towards corporate governance and limitations of investment powers. These have therefore had more impact upon portfolio managers and custodians with very little impact on transfer agents. This has created a bit of breathing space for transfer agents to begin to address the backlog of pent up demand for development to address process improvement, added value developments and new product or distribution opportunities.
Roberts: Almost all players within the asset management industry, be it asset managers, transfer agents, fund accountants or custodians will cite regulation and the rate of change as a core challenge. For valid reasons, regulatory reform and extension in Europe has been a constant and unrelenting element in recent years. Unfortunately it does bring increasing costs in the process. Ultimately, the continued focus by European policymakers on investor protection and corporate governance of firms should be seen as a positive for investors, but only if implemented correctly, consistently and with sufficient consultation. Regulators also need to be cognisant of cost benefit implications during the decision making stage.
Hakim: European harmonisation can only bring positive impact on the sector, both from an operations and technology perspectives. However, we are still way off complete harmonisation and we can only hope the move is accelerated and supported by all the EU members with no exceptions. We need to move away from ‘directives’ and agree on ‘mandates’. Full harmonisation will simplify technology development and allow operations to offer effective solutions, both of which would result in lower overall cost. The cost reduction would lower fund expenses thus benefiting the industry’s investors and shareholders.
Willis: The changes in law and regulation have a fundamental effect on the sector. The three areas of most change and impact are transparency to the end investor, taxation and increased share classes. They add cost to the sector but at the same time the transparency aspects lower the charge levels expected from the end investor; note the latest publications from platforms re post-RDR charging in the UK. The net effect is that margins are being squeezed at the fund manager level, which is then passed on to the transfer agent.
Today, the pricing point for transfer agency has reached a very low level. While we do not expect this to change, the only way to deal with this is by having a rapid step up in the levels of automation (STP) in the region. At BNY Mellon we are focused on how to become the most connected transfer agency platform across Europe.
Jonathan Willis: On the one hand, we differentiate our services regionally but on the other hand have a global approach through our global service model to the way our business works.
It’s about economies of scale. The administration activities between Asia Pacific (APAC) and Europe, Middle East and Africa (EMEA) use the same base technologies. We operate a global model and layer the clients’ local needs on top to ensure that they get a service, which is scaled globally with the essence of a localised and regionally compliant service. We focus on our understanding of local market practices, regulations, distributors and history to support our clients in rapid entry and MI provision.
Our discussions indicate that rather than wanting differentiated service models region by region, there is a good level of matching services that the distributor populations are looking for—particularly those who operate in multiple regions.
Paul Roberts: The key is to recognise the differing market structures that exist across each region. European markets, although more aligned than those in Asia, still face the challenge of being fragmented and less standardised than America. The continuing drive of regulation throughout Europe is slowly moving us in the right direction and aligning markets, however, issues still exist in local fund ranges with regards to reporting, taxation, language support and cash handling.
Labour costs and the pressures for accuracy and effective control have meant that high levels of automation are firmly established in the US and we see this trend growing strongly through Europe and in the early stages of progressing into Asia.
Different distribution models also exist in a number of countries. Transfer agency providers need to adapt and ensure we are well placed to support our clients target distribution channels. Distribution in continental Europe is dominated by the bancassurers (insurance provided by a bank), whereas UK retail investors are moving towards platforms with sub account models, similar to that of the US and Australia.
Yvonne Hurst: Calastone is a global company, and our transaction network is fully interoperable across domiciles. The priority is to connect companies both within and across nation states, so in that sense we don’t differentiate our level of service. Instead, we ensure that no matter what a company’s own internal technology infrastructure or preferred messaging formats, standards or protocols, we can connect them to their counterparties, without the need for them to change their own structures. We do this via our global transaction network, which means we can connect anytime, anyplace, anywhere.
When looking at fund transactions, one can see that in Europe the transfer agent model is quite mature, similar to that in the US. Asia is less established but growing fast, particularly in terms of the number of transactions being processed. To a great extent Asia has been able to jump straight from manual processing to an electronically automated transaction process, leapfrogging any earlier technologies previously available, which were not fully interoperable.
There are noticeable differences between Europe and Asia. Over the years, European clients have demanded more and more bespoke services and generally all work activities are based locally, which adds cost if charged back to the client. While in Asia, several of the transfer agents offer sub-transfer agency registers, where the funds are European yet distributed into Asia. In the mature markets we’re certainly seeing a consolidation of IT platforms.
Ghassan Hakim: The US has a largely retail and primarily domestic transfer agency operating model, with limited multi-currency and multi-lingual capabilities when compared with other major fund centres in the world. Operating in one single regulatory environment has allowed for the market-wide adoption of standardised practices, allowing the industry to have a standard platform for trading, clearing and settlement.
The European market by contrast is different because it has traditionally had to cater for a multitude of operating models, taxation regimes, languages and currencies in multiple jurisdictions, distributing funds into multiple individual markets. Although there have been significant steps taken by the EU to try and consolidate this fragmented market, there still remains much local legislation to contend with.
Although less established, Asia is similar to Europe in that it is comprised of a multitude of distinct markets that are individually defined by their own particular distribution models and regulatory environments.
In order to appropriately service the respective needs of each region, transfer agents need to ensure that their underlying technologies are adequately equipped to move with the times.
Aubrey Nestor: Bravura’s clients are predominantly the European based arms of fund management companies and third party administrators which distribute their funds globally. The majority of this distribution is conducted cross-border from the European offshore markets of Luxembourg and Dublin with a smaller proportion based upon locally domiciled funds in Asian markets.
A substantial part of the cross-border distribution into the North American market is automated via the National Securities Clearing Corporation (NSCC) platform with similar automation into Canada via the Canadian FundSERV platform beginning to gain traction. Bravura provides support for this using our Babel STP messaging solution, which supports automated trading via both these platforms.
A significant amount of non-STP business is also still conducted with America and for this our clients use remote service centres situated in the US and operated either by their own staff or by partner companies. Bravura’s Rufus transfer agency platform supports a remote service centre feature, which permits trades to be entered directly into the central transfer agency system from geographically distant service centres that can only access their own partitioned subset of the database to service their own local investors.
Cross-border distribution into the Asian markets is much less automated and is still heavily reliant on faxes. Our clients do, however, use the Rufus remote service centre feature to allow them to locate their front line transfer agency administration staff into geographic locations which are in a similar time-zone to the markets they are distributing into—Hong Kong, Singapore and Taiwan being the most popular locations.
What are the challenges in increasing automation in the region?
Nestor: Intra-European business is now achieving quite high levels of automation for trading and, to a lesser extent, settlement. A significant level of European funds business is, however, transacted with markets outside of Europe and some of these markets, particularly within Asia, are not making the investment to move beyond fax communication. This is holding back automation. The challenge is to incentivise those Asian distributors to move from fax to message or file based communication by showing the advantages that will accrue to them.
These include faster processing and response, greatly reduced risk of processing error, automated machine-readable confirmation messages and automated trade side postings into STP settlement systems. This is likely to be a long-term educational process but it could accelerate quite quickly once the tipping point is reached within a particular national market. It is also likely that progress will vary on a country-by-country basis.
Many larger European transfer agencies have already developed STP trading and settlement linkage with NSCC for distribution in North America, using connectivity tools such as Bravura’s Babel. We are also starting to see increasing interest for our newly developed Canadian FundSERV Babel module.
Automation of distribution of European funds into the South American markets is in a much more fledgling state. It is hoped that these markets will be less attached to the fax than their Asian counterparts and will move to embrace standards-based STP from the outset.
Willis: One of the greatest challenges in the region is that different jurisdictions have different platforms with different proprietary message formats. We have recognised the issues this creates and using both our own custody messaging solutions combined with Babel, we have adopted a strategy that enables platform plug in for deal execution and settlement at speed.
Additionally, we have been working with key platform providers, eg, Calastone to identify the gaps in service, why platforms are not used as extensively as they might be and plugging those gaps. We have seen early success, increasing STP rates in the UK alone by circa 5 percent in the last two quarters of 2013.
Hakim: Increasing automation where possible is clearly an attractive prospect for transfer agents due to the decrease in operating costs and increased efficiencies that are traditionally associated with automation.
Automation levels continue to vary from country to country but within markets that have invested a considerable amount of time, effort and money in automated solutions, fund providers, distributors and third party administrators are now reaping the benefits where possible. Europe has reached a position where there are useful levels of automation, and the standardisation of processes has allowed automated deal processing in particular to flourish, resulting in reduced operational costs and lower processing error rates but there is still a way to go and there is still a lot more STP investment needed, particularly for alternative investments.
Throughout the industry, there are increased calls for a global transfer agency platform that can service multiple product types, replacing multiple legacy systems, each focused on a particular investment vehicle. The current landscape of multiple systems carries higher cost, redundancies, training challenges, and inefficiencies in disaster recovery plans and so much more. Software providers and IT departments need to refrain from ‘band-aid’ solutions like developing surround systems to their legacy platforms and start focusing on developing an integrated single solution.
Hurst: Once a company decides to automate, the process is rapid and the advantages can be significant in terms of increasing efficiency and lowering costs. The hardest challenge is making that initial decision. The decision might be delayed due to a lack of information on how to make the changes, or concerns over whether adopting any new technology will require an upfront investment. But it is much easier than perhaps some imagine, and there are no unexpected hurdles in the transition. Calastone can get a customer connected to their global transaction network very quickly, and this without the need for internal technology changes. The pace of adopting automation is accelerating, as companies recognise the benefits.
Some of the challenges tend to be the upfront cost in terms of legal requirements, any charges levied by the transfer agent, transfer agency appetite due to lower revenues—especially if outsourced to lower labour markets, or it might be that there are complicated staffing re-allocation considerations. Automation is also sometimes overlooked when a company’s employment strategies have to consider domestic labour laws and social policies. But there is another reason, perhaps as important as any mentioned, that some transfer agents are still not quite ready to demand an end to the fax. I think it’s time they probably voiced their concerns more forcibly.
Roberts: Institutional trading volumes continue to rise in Europe and we are seeing higher levels of STP now than we ever have. Issues arise as new products continue to enter each market leaving a legacy of historic products and associated operational processes, hindering the take up for retail automation. New regulations and legislation, particularly around know your customer/anti money laundering requirements present additional challenges to comply with and keep the process as smooth as it can be for our clients, their distributors and the end investor.
Extending automation beyond buys and sells to transfers present a new set of challenges.
What are the latest developments to affect the transfer agency industry?
Roberts: Asset managers and distributors continue to demand consolidated platforms to address their record-keeping needs. In addition, these capabilities need to be available across a broad spectrum of products on a regional or global basis.
Changes to distribution channels in Europe, in particular the rise of direct-to-consumer platforms for retail investors and of new technologies, means the customer can now rightly be put centre stage. It is vitally important that the customer, be it an end investor or financial institution, has the best possible experience when dealing with the transfer agency provider. Regulations also continue to create their own ongoing pressures.
Hurst: There are a number of regulations that have impacted upon decision making of transfer agents. For example the continued regulatory obligations such as the Retail Distribution Review (RDR), The Foreign Account Tax Compliance Act (FATCA), and know your customer requirements regarding identification. All this has all increased the amount of work involved for transfer agents on the transaction side. Other impacts include the movement of clients, and several transfer agents are looking at the strategic importance of offering the service.
Global custodians will have to consider in the future whether having an in-house transfer agency service is going to be profitable or a necessary evil in order to win more value added services from a strategic client. Clients are rightly demanding more efficiency, more globalisation and more consolidation from their transfer agents and be looking for them to offer wider distribution. The focus is clearly greater efficiency and better service. Several transfer agents are trying to move to one global IT solution, to lower cost and to show greater flexibility, in terms of business continuity planning and disaster recovery. The transfer agency is pretty commoditised and it doesn’t make sense to run multiple platforms.
Nestor:Regulation continues to have a major impact on the transfer agency industry and the software providers that support it. The impact is twofold. Firstly there is an almost constant need for system and process enhancement to support new regulatory requirements. This creates a more complex ongoing administration and support burden. Secondly, there is its potential impact on the funds market as a whole eg, the UK RDR legislation may have a radical effect on which kind of products people buy and FATCA may have a significant impact on which fund domiciles people invest into. It may take some time to see whether these impacts are beneficial or disadvantageous to the market.
Technology advances are also changing the transfer agency market. We’ve seen year-on-year increases in processing power and screen resolution for devices such as smartphones and tablets, together with the mass market penetration achieved by their inversely rapid decrease in cost.
This is driving demand for systems that permit users to view, service and trade on their accounts from these mobile devices on a 24/7 basis. There is significant interest in systems which facilitate this kind of ‘self-service’ by investors, both because they deliver a perceived increase in service in the eyes of the investor but also because ‘self-service’ is the ultimate form of admin free STP processing for the transfer agent.
Hakim: Faced with increasing demand to stay ahead of the curve for all of the impending changes faced by our industry, transfer agencies whether internal or outsourced, are in the process of transitioning from a traditional cost centre to a more added value service.
Changes faced by the industry include a raft of complicated tax changes, increasingly complex investment fund structures and global distribution models, and a seemingly unstoppable wave of new regulations, all of which are putting increased pressures on transfer agents.
Our role, as the solution provider, is to keep designing and implementing solutions that allow our clients to meet these increased demands cost efficiently whilst 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 TA solution capable of servicing the cross-border distribution of multiple product types across multiple jurisdictions with a single investor view is very attractive.
Willis: A combination of factors including regulatory, changing economic dynamics around the globe and the fundamental shift in use of technology particularly over the past five to 10 years means that transfer agency is changing. Transfer agency is the point of contact with the end customer—be they distributor, advisor or retail investor. As their habits change, so must our services to support their needs.
The biggest developments are around regulatory and market change. Particularly pertinent to this are client money changes as well as tax legislation. We have a dedicated EMEA regulatory and market change team who form house views via our industry knowledge and interaction to determine the best approach to operational change, ensuring that our clients are fully versed in the changes and their implications.
Do you think it is advantageous to outsource transfer agency functions to cheaper labour markets?
Hakim: The correct answer to this question is the development of a global sourcing business model as the solution for an effective transfer agency. It would be wrong to only factor cheaper labour markets as the basis of where functions are performed. The priority for any service provider is to ensure that they have efficient procedures and processes in place, and a team that possess the required skills and expertise to deliver a high quality of service.
A comprehensive global sourcing model factors in client facing functions versus back-office functions within the context of global and regional presence, the ability to service clients seamlessly through the various time zones and have strong ‘live’ disaster recovery centres. For example, a global sourcing model allows a transfer agent to shift service functions on moment’s notice to address local disruptions, whether climate induced or political.
Technology today already supports global sourcing models with web-enabled systems, global imaging and workflow solutions, advanced audio and video communication tools and growing social media.
Nestor: Offshoring administration can be very advantageous if done properly but it is also easy to get it disastrously wrong. It depends initially on a very highly committed management approach to establishing the offshore office(s), hiring the right calibre of local staff (in particular the local management team) and getting them trained and equipped. Being able to second experienced central transfer agency staff out to the offshore offices for training and familiarisation work is also crucial.
From the outset and on an on-going basis it is essential to get top down management buy-in to making the remote administration approach work and building trust. A senior manager from one of our large transfer agency clients which has successfully made offshore administration work for them said that the tipping point came when they stopped asking, “can we trust the remote admin team to handle this activity?” and started asking, “why can’t we trust the remote admin team to handle this activity?” This presumption of competence is vital.
Another key success factor is having systems that can be deployed globally and also which support global work distribution. Bravura’s Rufus transfer agency system has a very tightly integrated image and workflow tool that has permitted one of our major transfer agency clients to implement an offshore administration facility. It can now seamlessly and easily move work items across the globe and back again.
Hurst: With the level of innovation today I think companies should look at automation and streamlining processes rather than outsourcing to cheaper locations, which is initially very costly anyway due to project costs, training and implementation, client consent, staff redundancy or the costs of training staff to use new technology systems. Outsourcing highly manual tasks to cheaper locations can be a very shortsighted strategy, especially when the industry is rightly demanding ever higher quality when it comes to efficiency in technology.
Willis: It can be advantageous providing you are clear about the types of services being offshore. For example, we retain our client contact function in EMEA but we offshore activities like deal processing and other functions to our office in India. The benefit to us of places like Pune is that we are able to get extremely highly educated people working in administrative functions providing our clients with high quality services. Outsourcing is also becoming popular nearer to home, such as Poland and some of the eastern European states.
Cultures, skill sets and working practices are important considerations. Lastly, you need to ensure you have really strong business continuity planning so that in the event of a crisis you can bring your function back without significant impact on service provision.
Roberts: Offshoring certain non-customer facing functions to alternative labour markets definitely has some advantages, but responsibility and control must not move. At IFDS, we have been very pleased with the high quality of work, the consistency and the enthusiasm of our offshore employees. Importantly, it is not simply a case of ‘throwing work over the fence’.
We are fully engaged on a daily basis with our offshore senior management team and ensure that the whole operation makes everyone feel part of a single, unified team. This, however, is not a quick-win process. We have employed permanent, locally based management at our Indian operation for several years. It has taken us ten years of relationship building and hard work to get us to the strong position we see ourselves in today.
Clients are looking to merge their funds located in different domiciles. How will consolidation of this kind affect the industry?
Hurst: It will probably lead to consolidation of the transfer agencies, and perhaps only the strongest will survive. Regulations will continue to create huge demands on the industry, which will either lead to further investment in the industry, or it may lead to the development of more manual processes which will only serve to increase the risk premium. Transfer agency tariffs will need to factor all work involved in meeting new regulations and reporting. Gone are the days of the price wars, which will only be good for the industry. Consolidation might also lead to a global standardised pricing structure. If that happens and the margins on tariff differentiation between the transfer agents declines, then investors may look more heavily at the differences in service element.
Willis: Many fund managers are looking beyond traditional markets for new growth but they do not wish to have funds per jurisdiction, multiple service providers and multiple service models. The UCITS regulations have facilitated fund sales across domiciles and the end customers require different and modern servicing mechanisms. Our solutions facilitate the use of UCITS legislation across multiple jurisdictions using a consistent service model, supported by solutions and products tailored for use by particular investor types.
The role of the transfer agency is expanding from simply being an order taker to becoming a distribution enabler. Our new global operating model covers EMEA and APAC, reflecting the importance of emerging markets as a source of growth, providing a consistent service around the globe. Clients need a service that facilitates the provision of funds in multiple jurisdictions, which we provide using master feeder regulations through the use of the single database. Every other transfer agency model has been built around the region. However, the systems need to talk to each other. Rather than being about reporting back from a single account, we provide a single database to give a fully consolidated view.
As well as facilitating use of UCITS funds via a single model in multi-jurisdictions, the transfer agency is also moving heavily into areas of distribution support such as relationship management, introductions, information delivery and we expect to develop these areas further in the coming few years.
Hakim: Like many other industries the fund industry is already consolidating; with mergers and acquisitions regularly making headlines.
The main impact of fund consolidation has been felt by those transfer agents that do not have a global transfer agency software platform. Transfer agents who have not adopted a global platform are not in a position to service their clients across multiple jurisdictions, and they are unable to cater for the complex distribution models; as a result of this, it is the single market domestic transfer agents and their software providers that have been the most adversely affected.
The advantage firmly rests with transfer agents able to provide their clients with the international coverage that is required, and that have the experience of supporting distribution into multiple jurisdictions. Our flagship product, Riva TA, is such a global solution. Riva TA deploys to multiple jurisdictions including all cross border and offshore jurisdictions, is neither limited to one physical location nor to one jurisdiction or fund structure and incorporates the different languages, time zones, currencies and the specific parameters associated with each, including the required regulatory and tax rules relevant to each jurisdiction.
Nestor: The UCITS IV legislation permits a fund manager to have a single range of funds domiciled in any EU country but to freely market those funds into any other EU country. This can be directly or via local domestic feeder funds.
In the past the difficulties of cross border marketing within the EU led many fund managers to create a separate set of very similar or even duplicate fund ranges for each retail domestic EU country that they wished to sell into. For these managers the prospect of collapsing all of their national domestic fund ranges into one central fund range might be very appealing.
This will allow them to shed the cost of duplicating the effort of portfolio management, fund accounting and custody for these funds. Interestingly transfer agency is one area where they won’t make as significant a saving because they will still (hopefully) be performing the same number of investor transactions. They will save the duplication of applying prices and running dividend distributions across multiple fund ranges.
There are still some tax issues regarding the required fund mergers and the treatment of feeder funds, which are holding back widespread usage of this enabling legislation. Once they are ironed out the companies who adopt this approach are likely to enjoy a significantly lower cost base than similar companies who do not.
If a single central transfer agency system is to be used then it is vital that this system has full multi-currency and multilingual support. It must also be flexible enough to handle differences in local domestic regulations and market practices (eg, different consumer protection rules, different manual/automated anti-money laundering checking approaches and different tax incentivised products).
Roberts: Fewer fund ranges should drive down cost and so deliver benefit for the investor. This also causes less revenue for transfer agents and will continue the concentration in the transfer agency industry. Transfer agency cannot be done in half measures; it needs a minimum scale.
How is European regulation affecting the sector?
Hurst: Regulation has many known benefits, but one of the less well received implications recently has been the impact it has had on driving up costs for both the fund provider and the transfer agent. New regulations mentioned above have been, in part, expensive to implement. Indeed I go as far in saying that it may prompt the end of the ‘in house’ transfer agency solution. Perhaps we will see service providers sharing the costs across their client base, to make the costs more palatable.
Nestor: In recent years there have been a number of regulatory initiatives, which have had a significant impact on the European transfer agency market. These included EU regulations (eg, UCITS IV), domestic national regulations (eg, RDR) and US regulations (eg, FATCA). This has led to a period of a year or two where the industry has focused its development budget very much on compliance.
Whilst there have subsequently been a significant number of further new regulations the thrust of these has been more towards corporate governance and limitations of investment powers. These have therefore had more impact upon portfolio managers and custodians with very little impact on transfer agents. This has created a bit of breathing space for transfer agents to begin to address the backlog of pent up demand for development to address process improvement, added value developments and new product or distribution opportunities.
Roberts: Almost all players within the asset management industry, be it asset managers, transfer agents, fund accountants or custodians will cite regulation and the rate of change as a core challenge. For valid reasons, regulatory reform and extension in Europe has been a constant and unrelenting element in recent years. Unfortunately it does bring increasing costs in the process. Ultimately, the continued focus by European policymakers on investor protection and corporate governance of firms should be seen as a positive for investors, but only if implemented correctly, consistently and with sufficient consultation. Regulators also need to be cognisant of cost benefit implications during the decision making stage.
Hakim: European harmonisation can only bring positive impact on the sector, both from an operations and technology perspectives. However, we are still way off complete harmonisation and we can only hope the move is accelerated and supported by all the EU members with no exceptions. We need to move away from ‘directives’ and agree on ‘mandates’. Full harmonisation will simplify technology development and allow operations to offer effective solutions, both of which would result in lower overall cost. The cost reduction would lower fund expenses thus benefiting the industry’s investors and shareholders.
Willis: The changes in law and regulation have a fundamental effect on the sector. The three areas of most change and impact are transparency to the end investor, taxation and increased share classes. They add cost to the sector but at the same time the transparency aspects lower the charge levels expected from the end investor; note the latest publications from platforms re post-RDR charging in the UK. The net effect is that margins are being squeezed at the fund manager level, which is then passed on to the transfer agent.
Today, the pricing point for transfer agency has reached a very low level. While we do not expect this to change, the only way to deal with this is by having a rapid step up in the levels of automation (STP) in the region. At BNY Mellon we are focused on how to become the most connected transfer agency platform across Europe.
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