What is the current state of the European fund administration industry?
The current state of the fund administration industry has been shaped significantly by the introduction of numerous regulations which the industry has seen since the financial crisis, as well as rapid advances in technology. In terms of regulation, the Alternative Investment Fund Managers Directive (AIFMD), the second Markets in Financial Instruments Directive (MiFID II), the Foreign Account Tax Compliance Act (FACTA) and Common Reporting Standard (CRS) would be among the major regulations that have had an effect on the industry. Alternative investment managers are now increasingly opting for other solutions rather than the traditional alternative investment funds (AIFs) for instance, catered for within some innovative jurisdictions.
In Malta, for instance, the professional investor fund (PIF) regime, as well as the notified AlFs (NAIFs), have continued to grow in popularity with the former being a lighter-touch and less onerous regime for de-minimis alternative fund managers and de minimis self-managed funds, while the latter a fast-track solution for setting up AIFMD complaint AIFs.
In terms of technology, thanks to the continuous and rapid advancements, we are seeing more and more processes becoming increasingly digitalised within fund administration. Furthermore, with the growth and hype surrounding the blockchain and crypto space, we have seen a high demand for PIFs investing in crypto which is catered for by the supplementary rules to the PIFs, as published by the Maltese regulator. Fund administrators are also looking at distributor ledger technologies (DLTs) for shareholder registry services, replacing traditional platforms that cater to this space.
What trends are you currently seeing?
There are a number of trends within fund administration that we are currently seeing such as an increase in outsourcing, emphasis on cost, data protection and a focus on cybersecurity:
Outsourcing
With the ever-increasing demands brought about by regulation, fund administration now plays an even more pivotal role within the funds industry. Whereas previously a number of fund managers would opt to carry out the role in-house, the recent developments in the industry have rendered this challenging.
Many are therefore increasingly opting to outsource such role, thereby allowing fund managers to focus more on their core business and core competencies.
Cost
Investment managers remain under pressure to keep costs as efficient as possible, which can be quite challenging in light of the demands of the regulation. This has also led to an increase of fund managers outsourcing the fund administration to companies such as BOV Fund Services that benefit from both economies of scope and scale on this front and is thus able to pass on these efficiencies to its clients.
Fund administrators, in turn, have turned challenges brought about by regulation as an opportunity to expand their service offering to cover regulatory reporting on behalf of fund managers and the fund themselves, thereby increasing revenue streams that counter pressures on margins for the traditional services provided.
Data protection and cybersecurity
Given the introduction of the General Data Protection Regulation (GDPR) and the sensitive nature of information within the funds industry, the way service providers address this issue and handle such data is of utmost importance. Technological advances and the way data is stored have hence rendered cybersecurity and risk management critical.
How is technology changing the fund administrator role?
As mentioned previously, advancements in technology are leading to more processes becoming digitalised. In my view, technology presents an opportunity and a threat for most industries.
In fund administration, where competition is rather high, it is therefore important to take the decision whether to be a leader in times of change or simply a follower. As pioneers in the local funds industry, BOV Fund Services has always been considered a leader and is investing significantly in digital platforms to ensure high quality, accurate and timely results for its clients.
Of course, secure maintenance of necessary confidential data and protection from online hackers is also of utmost importance and is another area of great investment for managers and service providers alike.
Both the increased regulation and advancements in technology have led to the role of the fund administrator being transformed from a back-office operation to more of a core function within the funds industry.
What regulations are causing the biggest challenges? And can any of these challenges be turned into opportunities?
Every regulation tends to cause challenges to one degree or another, most notably those requiring a significant change in operation. Fund administration is among the industries that face a long and growing list of rules and pressures from clients to confirm that they are not exposed to undue risks of non-compliance. Many of the regulatory updates come with large demands which require additional, sometimes relatively significant, investment in training, in infrastructure and other resources with little direct bottom-line benefit to the industry. However, there are other potential positive impacts. In fact, with any changes, there are always opportunities.
I think most of the EU jurisdictions are nimble enough, some perhaps more than others, to address such changes in a way that betters their jurisdictional offering as a whole. For instance, with the introduction of the AIFMD back in 2013, Malta retained its home-grown regulation, allowing fund managers falling out-of-scope of the AIFMD to benefit from the lighter and more flexible regime that is the PIF rule book.
There can also be opportunities for becoming more competitive. For example, operating within a secure and robust framework has become of increasing importance to investors especially since the financial crisis. Therefore, regulatory compliance apart from being mandatory can also serve to attract more investment managers, as backed by their investors. Moreover, some regulatory changes require investments in business and computer systems which can indeed serve to enhance the overall efficiency of the company in the long-run.
How is Brexit challenging fund administration in Europe?
Since the outcome of the referendum back in 2016, we have seen many asset managers taking quick decisions and planning for what has become the more likely scenario of a hard Brexit. (At the time of writing, it is still unclear as to where Brexit is going). Many management companies have actually set up operation within EU member states that present themselves as ideal fund management domiciles, as is the case for Malta.
Questions still remain as to what will actually be the outcome and the transition over the coming months, however, the recent memorandum of understanding (MoUs) issued by various jurisdictions, and especially the MoU between the Financial Conduct Authority and the European Securities and Markets Authority have relieved a lot of the pressure.
Nonetheless, there have been jurisdictions such as Malta, Ireland and Luxembourg, which have seen and continue to see quite a bit of traction with funds and management companies being set up in such jurisdictions to ensure smooth continuity of business in a worst-case Brexit scenario.
The effect of this on fund administration is, of course, the capacity requirements and the increased amount of resources and expertise required. If you look at Malta, for example, a number of fund administration companies such as BOV Fund Services have actually expanded on both human and technological resources over the past few years in order to cater for such demand and continue to provide a service to clients.
How will the market change over the next few years?
There are many things to be seen over the coming years. In the short-term, the outcome of Brexit and how that settles over the next few months and years will surely have an impact on the way the rest of the funds industry operates with the UK.
With respect to the more distant future—perhaps one may say that the funds industry has seen a drastic change from a situation of little regulation to a level playing field and a closer state of over-regulation which may be impacting the efficiency and interfering with the core function of asset management.
For this reason, I believe that the fund administration business may continue to witness more consolidation as other larger banks follow in the steps of Citi Bank and Credit Suisse to name a few, in exiting the fund administration business to focus more on their core business. That being said, it will also not be surprising to see more outsourcing and perhaps mergers of some fund administration companies in a bid to address the digital demands of digital transformation and stay ahead of market trends and investor needs.
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