According to the recent SWIFT investment management survey, KYC and AML have been highlighted as priority challenges for managers. Why are these being identified now?
Many tend to talk about the ‘tsunami’ of regulation, but I object to the word ‘tsunami’, because regulation is clearly here to stay. It’s part of the new world and we have to live with it, but it is having a great impact on the industry. ‘Know your customer’ (KYC) is the beginning of the relationship with your counterparty, so from that perspective it is very important. Investment managers need to know who they are doing business with.
KYC and anti-money laundering (AML) aren’t new. However, since the crisis in 2008, regulators have paid more attention to cross-border counterparties and have been issuing more fines, all of which have made asset managers increasingly vigilant. Because these fines are dramatically high, KYC and AML are at the top of the senior management-level agenda.
Investment managers don’t want the reputational damage, not to mention the financial impact, of a fine. The question is, now that it’s become so important, how do asset managers cope with the additional risk and cost associated with KYC/AML? Everybody has to do it, and the industry should be able to find a common solution so that they can focus on what they do best: making returns for the end investor.
If the industry comes to an agreement that this is a non-competitive space, then we can move forward and gather the necessary industry engagement to successfully reduce cost and risk for all participants.
In December last year, we launched the KYC Registry with an initial focus on correspondent banks. This will allow for all the KYC information from cash correspondents and their counterparts to be collected in one place, making it easier to do business, as not everybody has to collect the information individually. The results of the investment management survey confirm the demand of the investment managers to address the KYC burden in the funds distribution space.
Although the regulations are here to stay, is the rate of change likely to slow?
There has been a constant stream of new regulations in the last few years, and I would hope that at some point we will get a period of stability so that the industry can adapt and implement the required systems and procedures to be compliant. That being said, it’s not over yet. Asset managers still need to cope with new regulations that have the potential to significantly disrupt the landscape they operate in. For funds distribution, an important one is the Markets in Financial Instruments Directive (MiFID) II, which is similar to the Retail Distribution Review (RDR). Questions remain about how the ban on inducements will be translated in individual member states and the impact it will have on distribution strategies.
I think, after that, there will still be more regulations to come. The question will be how we manage these and how we communicate with regulators.
SWIFT is a member-owned cooperative and our role is to support the industry in reducing cost and risk by standardising data flows and automating the exchange of financial information. It is hard to predict what will happen next, but I think that at one point in the future there will be a basic set of regulations for all institutions to comply with—and it will be there to stay. However, it’s too early to know what the industry will look like once all these changes have been implemented.
It will depend on our industry, too. If we can manage to achieve transparency in an effective way, then we can take a big step forward and reassure both regulators and end users that the financial industry is in a good place. I think that might be the key.
Are you seeing an increase in outsourced services, or does that create more risk?
The question of outsourcing surfaced in our interviews with asset management firms: are organisations outsourcing, how are they outsourcing and are they creating increased dependencies when they do so? It’s possible that we will see a trend towards re-insourcing in order to manage that liability. Firms also have to be capable of managing their own data, as you may only be increasing complexity when you bring in third parties.
Within the asset management or fund management business overall, there is still a lack of standardisation. There remain significant flows today that have not been standardised, and I think the next step for the industry should be to look beyond automating order processes such as transfers, cash forecasts and price reports.
You can link this back to the KYC challenge. I see automation and standardisation as the key ingredients to enable asset managers to increase transparency, meet regulatory reporting requirements, and do so in a cost effective way.
Many fund managers have outsourced processes to transfer agents, and certain activities have largely become commoditised. Yet transfer agents have an opportunity to develop new services, for example, around distribution intelligence or reporting. There is a lot of talk about how asset managers are going to review their distribution channels to adapt to the changing investor landscape, and how transfer agents will capture some of these emerging opportunities remains to be seen.
What are the big issues surrounding fund distribution?
Regulatory change, as we have seen through RDR, and potentially will see with MIFID II, affect the way fund managers traditionally distribute. Although a ban on inducements should benefit the end investor, the question is what sort of unintended consequences this may have for collateral. Could we see investor orphans? Will it open the door for new distribution channels?
It will be interesting to see how managers distribute in the future, and how they will tailor their services to changing demands and changing investor types. The younger generation handles technology in a very different way, and the demands of the modern investor will inevitably change accordingly. Today, asset managers use mainly independent financial advisors, but tomorrow they may have to rethink the picture completely, in this as well as with outsourcing.
Corporate actions are perhaps a bigger issue for investment managers. As an industry, we very much acknowledge that in this area operational efficiency and risk management remain very costly issues for all players in the value chain. Investment managers receive their corporate actions information from a multiple sources and need to review, interpret and reconcile those data sets. The idea of a corporate actions ‘golden source’ utility has been around for many years and is more valid today than ever before, considering the increasing number of corporate action events and their complexity. That utility would supply all of the corporate actions information required, while maintaining the required transparency and servicing the investor in the best possible way..
Is the eventual aim to get a better service for the end investor?
For me, it is. I think the industry is continually striving towards that goal, and SWIFT helps to address the operational challenges in this dynamic period of change, allowing asset managers to continue to increase service levels to the end investor, while coping with regulatory requirements. Managers are actively trying to reduce cost and risk, which will ultimately benefit the investor. It’s all interlinked; operational efficiency, regulatory compliance and client service. That is what SWIFT is about.
We ran this investment management survey to identify where risk and cost remain in the ecosystem with the objective of fostering the dialogue around operational efficiency, cost and risk.
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