Darkest before the dawn
23 November 2016
Once financial services firms are through this swathe of regulation, they can start again with a clean sheet, says Mark John of Pershing
Image: Shutterstock
What does Pershing bring to the table for financial services firms?
Pershing provides outsourced services, be it technological, back-office or middle-office support. Some of these services are synonymous with the outsourcing functionality, and it’s a popular model, but over time the reasons for that popularity have changed. At times it has been because of pure variable cost models, because of pressure on balance sheets, or because of the improved ability to move into new markets or new asset classes. Depending on what the business is and the point in time, there is often a strong argument for employing an outsourced solution to get to the next stage of business.
Can this help firms to navigate the current complex regulatory environment?
At Pershing, we help our clients relieve the regulatory burden. To help our clients navigate through the regulatory landscape, we host quarterly compliance webcasts that provide updates on the regulatory impact on Pershing’s business and its clients, as well as information about regulatory projects conducted by Pershing. One of the key recent items on the agenda is obviously the second Market in Financial Instruments Directive (MiFID II) and Regulation (MiFIR), and especially topics such as transaction reporting, best execution or unbundling. In addition, under the Model B, the regulatory responsibility for holding client assets remains with Pershing.
The services we offer our clients are regulatory compliant. We have to consider our regulatory conditions in terms of exposures, how much business we’re actually processing, what the balance sheet value is, and how the regulatory environment looks in terms of the exposures we take on behalf of our clients.
It is important to remember that you can’t outsource regulatory responsibilities, and that anyone providing services to a suite of accounts is regulated in providing those services, so we have to be mindful of it.
What kinds of challenges are your clients facing?
The 2008 financial crisis created a lot of opportunities—and we are still talking about the effects of that crisis today. We saw an explosion of new firms coming to the market at that time, and Pershing helped a large number of them. Now, we are still seeing new firms taking the opportunity to come to market. Because costs of regulation and capital are such a large part of every organisation, everyone is looking at how to better manage that transition.
Firms could use a partner to manage their capital regulation obligation, or to help them overcome nervousness around entering a new market. The market structure is changing, for example with the ongoing Target2-Securities (T2S) project, and firms are considering how services will be provided in that environment compared to in their current network.
The conversation is really turning to whether firms can continue to do these things by themselves, even if they’ve been doing for many years at a large and successful organisation. They’re considering whether certain parts of the business are really core, and whether they want to continue to provide that service. Do they really want to be in that particular market or asset class? Do they really need the IT systems to support that part of the business?
This is where the Pershing model can be of some assistance. To remove a business line entirely today could mean an opportunity missed in the future, however, if a firm can simply take a step back, using a partner to take on that part of the business, it can retain the opportunity to stay involved in that business and to reap the rewards that might come from it in the future.
We can offer clients a way to stay involved in a manner that is more consistent with stability and with managing costs and exposures, that doesn’t mean they have to fully remove themselves from the market.
One other key challenge is the issue of legacy systems that many firms operate on. As investment banks and brokers have adapted to different requirements, they have created many bespoke solutions that are difficult to break. Because our clients are so diverse, it places us in a fortunate position of holistic experience in helping them drive out stale technology.
To what extent are you seeing a culture-change towards cost-efficiency?
Cost efficiency is another thing that is driving a lot of the conversation at the moment. Previously, depending on what kind of regulated firm you were, outsourcing could have been considered by some as a dirty word. Nobody wanted to admit that there was a problem, and therefore outsourcing was just not on the agenda. It’s very different now. People are focusing on cost efficiencies and looking at underlying revenues, and outsourcing is something that CFOs are starting to reignite as part of the agenda.
The culture is also moving generally towards more open ideas—whether that’s cost efficiency in its purest form or simply maintaining a regulatory framework for compliance and for risk. Everything, from the regulatory environment to the IT infrastructure supporting it, is being reconsidered, and a lot of cuts have already been made across the board.
People have alternative views now as to what is good for the business, the clients and the stability of the organisation. If there is a way to maintain a model that supports all those aspects, that is worth considering.
Is there also more of a drive to benefit the end client?
Organisations are certainly concentrating resources on demonstrating that they’re investing in their clients. They’re focusing on keeping clients happy, on giving them a more direct and personalised service, and on generally putting them at the centre of everything they do. For any organisation that has an element of customer service, if it can demonstrate savings that help them maintain a client, or pass on cost savings, that’s definitely something they’re going to consider. Of course, they want to create efficiencies for the firm, but if that also translates to efficiencies for the client, that’s even better.
That said, the industry has always been about providing a service. We are all consumers in one way or another, and when things don’t go our way, our voices get louder and louder until they do—and that goes for both individuals and organisations. The responsibility has always been there to look after the clients, but client expectation is now becoming a much louder voice in that conversation.
In many ways, the actual products and services provided are not where firms make the difference. They add value through maintaining strong client relationships.
How do you see the industry developing in 2017 and beyond?
It will be interesting to see what is coming up in terms of the economic outlook. We are working towards the final waves T2S coming online, we have the capital markets union fast approaching, and we are still waiting for the second Markets in Financial Instruments Directive (MiFID II) to come into force in its fullest form.
With all of these things combined, along with external and political influences and with the markets behaving in the way they are, we are facing a very interesting time.
It feels as if a lot of these changes are unravelling in slow motion, as opposed to causing a shock to the market. Some of the post-crisis regulatory overhauls are starting to come to an end, and it’s interesting to see how ideas and solutions are being formulated and discussed, and how outlooks and ideas are shifting.
The current run of regulatory change will take us up to 2019. Then, when—in theory—everything is implemented and in place, we can get a clear idea of what the unintended consequences are, and of what we could, or should, be doing better. That will be the next chapter in our progression as an industry.
There is a danger that if we try to influence the current regime of change now, we could destabilise the progress we have already made.
We need to stick to the plan, and then bring good ideas to the table for the next phase. It’s about being patient, thoughtful and responsible, so that once we’ve got through this swathe of regulation, we can start again with a clean sheet.
Pershing provides outsourced services, be it technological, back-office or middle-office support. Some of these services are synonymous with the outsourcing functionality, and it’s a popular model, but over time the reasons for that popularity have changed. At times it has been because of pure variable cost models, because of pressure on balance sheets, or because of the improved ability to move into new markets or new asset classes. Depending on what the business is and the point in time, there is often a strong argument for employing an outsourced solution to get to the next stage of business.
Can this help firms to navigate the current complex regulatory environment?
At Pershing, we help our clients relieve the regulatory burden. To help our clients navigate through the regulatory landscape, we host quarterly compliance webcasts that provide updates on the regulatory impact on Pershing’s business and its clients, as well as information about regulatory projects conducted by Pershing. One of the key recent items on the agenda is obviously the second Market in Financial Instruments Directive (MiFID II) and Regulation (MiFIR), and especially topics such as transaction reporting, best execution or unbundling. In addition, under the Model B, the regulatory responsibility for holding client assets remains with Pershing.
The services we offer our clients are regulatory compliant. We have to consider our regulatory conditions in terms of exposures, how much business we’re actually processing, what the balance sheet value is, and how the regulatory environment looks in terms of the exposures we take on behalf of our clients.
It is important to remember that you can’t outsource regulatory responsibilities, and that anyone providing services to a suite of accounts is regulated in providing those services, so we have to be mindful of it.
What kinds of challenges are your clients facing?
The 2008 financial crisis created a lot of opportunities—and we are still talking about the effects of that crisis today. We saw an explosion of new firms coming to the market at that time, and Pershing helped a large number of them. Now, we are still seeing new firms taking the opportunity to come to market. Because costs of regulation and capital are such a large part of every organisation, everyone is looking at how to better manage that transition.
Firms could use a partner to manage their capital regulation obligation, or to help them overcome nervousness around entering a new market. The market structure is changing, for example with the ongoing Target2-Securities (T2S) project, and firms are considering how services will be provided in that environment compared to in their current network.
The conversation is really turning to whether firms can continue to do these things by themselves, even if they’ve been doing for many years at a large and successful organisation. They’re considering whether certain parts of the business are really core, and whether they want to continue to provide that service. Do they really want to be in that particular market or asset class? Do they really need the IT systems to support that part of the business?
This is where the Pershing model can be of some assistance. To remove a business line entirely today could mean an opportunity missed in the future, however, if a firm can simply take a step back, using a partner to take on that part of the business, it can retain the opportunity to stay involved in that business and to reap the rewards that might come from it in the future.
We can offer clients a way to stay involved in a manner that is more consistent with stability and with managing costs and exposures, that doesn’t mean they have to fully remove themselves from the market.
One other key challenge is the issue of legacy systems that many firms operate on. As investment banks and brokers have adapted to different requirements, they have created many bespoke solutions that are difficult to break. Because our clients are so diverse, it places us in a fortunate position of holistic experience in helping them drive out stale technology.
To what extent are you seeing a culture-change towards cost-efficiency?
Cost efficiency is another thing that is driving a lot of the conversation at the moment. Previously, depending on what kind of regulated firm you were, outsourcing could have been considered by some as a dirty word. Nobody wanted to admit that there was a problem, and therefore outsourcing was just not on the agenda. It’s very different now. People are focusing on cost efficiencies and looking at underlying revenues, and outsourcing is something that CFOs are starting to reignite as part of the agenda.
The culture is also moving generally towards more open ideas—whether that’s cost efficiency in its purest form or simply maintaining a regulatory framework for compliance and for risk. Everything, from the regulatory environment to the IT infrastructure supporting it, is being reconsidered, and a lot of cuts have already been made across the board.
People have alternative views now as to what is good for the business, the clients and the stability of the organisation. If there is a way to maintain a model that supports all those aspects, that is worth considering.
Is there also more of a drive to benefit the end client?
Organisations are certainly concentrating resources on demonstrating that they’re investing in their clients. They’re focusing on keeping clients happy, on giving them a more direct and personalised service, and on generally putting them at the centre of everything they do. For any organisation that has an element of customer service, if it can demonstrate savings that help them maintain a client, or pass on cost savings, that’s definitely something they’re going to consider. Of course, they want to create efficiencies for the firm, but if that also translates to efficiencies for the client, that’s even better.
That said, the industry has always been about providing a service. We are all consumers in one way or another, and when things don’t go our way, our voices get louder and louder until they do—and that goes for both individuals and organisations. The responsibility has always been there to look after the clients, but client expectation is now becoming a much louder voice in that conversation.
In many ways, the actual products and services provided are not where firms make the difference. They add value through maintaining strong client relationships.
How do you see the industry developing in 2017 and beyond?
It will be interesting to see what is coming up in terms of the economic outlook. We are working towards the final waves T2S coming online, we have the capital markets union fast approaching, and we are still waiting for the second Markets in Financial Instruments Directive (MiFID II) to come into force in its fullest form.
With all of these things combined, along with external and political influences and with the markets behaving in the way they are, we are facing a very interesting time.
It feels as if a lot of these changes are unravelling in slow motion, as opposed to causing a shock to the market. Some of the post-crisis regulatory overhauls are starting to come to an end, and it’s interesting to see how ideas and solutions are being formulated and discussed, and how outlooks and ideas are shifting.
The current run of regulatory change will take us up to 2019. Then, when—in theory—everything is implemented and in place, we can get a clear idea of what the unintended consequences are, and of what we could, or should, be doing better. That will be the next chapter in our progression as an industry.
There is a danger that if we try to influence the current regime of change now, we could destabilise the progress we have already made.
We need to stick to the plan, and then bring good ideas to the table for the next phase. It’s about being patient, thoughtful and responsible, so that once we’ve got through this swathe of regulation, we can start again with a clean sheet.
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