Keeping up with the custodians
16 Oct 2017
As if the regulatory environment, cyber threats and cost challenges weren’t enough, custodians are also under more pressure than ever to compete
Image: Shutterstock
Along with the rest of the financial world, the custody business is in flux. The oft-cited challenges of regulation, cyber threats and cost constraints have bought unprecedented pressure to an industry used to trundling along at its own pace. And, on top of this, custodians are facing more scrutiny than ever from their clients, and must keep up with competitors if they’re going to stay in the game.
In June, BNP Paribas and Tabb Group released a report, Safekeeping Empowered: Reimagining the US Custody Business, which noted that traditional custodians retain a certain image of being “pillared institutions vaulting securities, collecting income and calculating net asset values for funds”.
However, the modern custodian, the report argued, is in fact more of a technology-focused institution, and should be adopting and developing new means of attracting and retaining assets, lest they submit “to the perception”.
Francis Jackson, head of global client coverage at RBC Investor & Treasury Services, notes that, while custodians are managing their own new regulatory demands, they also have to cope with the demands from clients trying to stay abreast of their own regulatory obligations and market trends.
He adds that there are also changing perceptions around outsourcing, “with service providers moving further up the value chain of their clients”.
Jackson says: “As custodians, our role is to help clients understand how new pressure and new technologies are shaping the industry. We need to recognise that clients face pressure on fees and returns, investing in the appropriate areas that support client growth.”
And these clients are only becoming more clamorous, with their own cost pressures meaning they expect better services for their buck.
Bruno Campenon, head of the financial intermediaries and corporates client line at BNP Paribas, observes: “The angle has shifted to a situation where clients are asking what technology custodians have to offer, and how it can help them.”
“Clients are struggling with regulatory requirements, particularly with adapting their infrastructures around those requirements.”
This has led to changes in the balance between off-the-shelf and bespoke solutions, with the focus shifting further towards tailored services. While custodians may see a cost benefit from providing more automated services, clients are demanding more personalised features and a more individual approach to customer services.
Indeed, in the Tabb Group survey, customer services emerged as the top priority when selecting a new custodian, alongside value for fees, with both selected as the most important consideration by 18 percent.
These were closely followed by operational expertise, considered most important by 16 percent, while technology offerings came in only at fourth, selected by 14 percent.
Campenon says: “We need to think about industrialisation from a cost angle, but we need a different angle for more bespoke services, providing specific types of reports and specific access to information.”
“We are shifting to a mix of commoditisation and bespoke services, to add value to our clients and the clients of our clients.”
Jackson adds that asset managers are increasingly turning to providers for “enhanced capabilities”.
“In addition to the custody and fund administration services that we tailor to each of our clients, we are able to draw on our deep regulatory expertise and resources to monitor and provide them with insights into how forthcoming regulation will impact their middle and back-office operations.”
“While much of the traditional activities of custodians have become commoditised in recent years and many clients are looking for omnibus services to assist with regulatory requirements, there is still great scope to provide personalisation through the quality of the relationship and the service delivery.”
However, such provisions will require investment from the custodians, and these costs are likely to be passed to the clients, who will be unimpressed, to say the least, to see their fees on the up.
Campenon says: “It’s a bit of a stretch, because of the costs, but it’s also an opportunity. We have a tremendous amount of information available, it’s a matter of finding the right way to use that to the benefit of our client and their clients.”
He adds that this investment may be necessary anyway, simply to stay in tune with the movement of the rest of the market. Focusing on one solution, simply to find that market trends have gone in another direction, could be damaging.
“We need to make sure we’re not working on something completely different to what the rest of the market is working on. We don’t want to end up in isolation.”
Equally, RBC’s focus is on collaboration in order to remain competitive, and to adapt to the “changing operating environment”, Jackson says.
However, he notes: “At the same time, we also need to continue to invest in our people, helping them to understand changing working practices, training them with new skills and empowering them to dedicate more time to high-value tasks. It’s all about becoming more agile and collaborative in order to better service our clients.”
The survey asked clients what they wanted their custodians to invest in in 2017. The top priorities emerged as cloud computing and digital identity, with distributed ledger technology (DLT) and AI coming in third and fourth place, respectively, and big data and cybersecurity trailing relatively low on the bottom of the priority list. However, with regards to the technologies respondents think will have the greatest effect on operational efficiency, blockchain, or DLT, emerged as the biggest potential gamechanger over the next year, named by 33 percent, followed by regulatory technology, named by 27 percent. Big data analytics, again, is not considered to be a big factor in the near-term, with no respondents at all considering it to have an effect on efficiency within the next year.
However, looking ahead five years, the picture is starkly different, with blockchain, regtech and big data analytics named the most impactful technology by 33 percent of respondents apiece.
Jackson agrees that there will be an increasing focus on big data, which he says “has the potential to transform the custody and fund administration space and provide asset managers with meaningful insights for their own clients”.
He says: “Reams of client data is produced, but it is of little use unless insights and opportunities can be gleaned from it.”
RBC I&TS is therefore working on improving its data management capabilities, with a view to helping clients improve their distribution services, manage client assets, and “ultimately manage risk and cost more efficiently”.
Campenon, on the other hand, considers blockchain “more interesting”. Regtech is a necessity, and will therefore continue to grow, he says, and improving technology will only aid the development of big data capabilities, but blockchain is a more “compelling case”.
Although the survey results suggest the industry anticipates efficiency gains from blockchain in both the near- and long-term, Campenon suggests that development is not currently particularly evident in the market, in real terms.
He says: “I trust that firms are using blockchain, and familiarising themselves with what they can do with it, to ensure they don’t miss the trend, but it can appear that it is not evolving at all.”
“In five years’ time, we will have more detail around what can be done, more examples of what’s happening in the market infrastructures, and more experience in what works and what doesn’t.”
“I’m hoping that at that point it will be more representative in terms of technology in the market.”
He adds: “I’m not surprised that blockchain remains a high priority, but I am surprised it’s not more progressive.”
Jackson, on the other hand, has doubts that, even in five years’ time, blockchain will be developed enough to offer a feasible solution either for custodians or their clients.
He says: “Much has been said about what it can achieve, but there are question marks over the ability of disruptive technologies to achieve the desired operational efficiency and effective risk management that custodians and their clients demand, for at least another five to ten years.”
In the custody industry, as in every industry, the world is undoubtedly changing, and ever-more demanding clients expect their providers to keep up.
The US’s recent move to a T+2 settlement cycle has been a long time coming, and firms were prepared, however the Tabb Group report suggests there’s a feeling in the industry that “it’s only a matter of time until T+1 is mandated”.
This expectation, along with existing regulatory restraints, means there is even more pressure to come. The report says: “Automation of manual processing has always been an objective of financial services firms.”
“However, our research indicates that it is now more critical than ever if compliance with regulation such as T+1 and reduction in costs are ever going to truly happen.”
This demand for automation is likely to lead to consolidation in the industry, or to some custodians exiting the space altogether.
A huge 80 percent of survey respondents said they think there will be fewer custodians in the market in three years’ time. The other 20 percent say they think the numbers will remain the same.
Ultimately, on top of—and perhaps because of—regulatory obligations and pressure to invest in technology infrastructures, Campenon suggests that “banks need to become global in order to survive in the custody space”.
He says: “When a custodian has clients coming from a specific jurisdiction, it needs to abide by the rules of that jurisdiction. Custodians can no longer be niche players, choosing to be either local or regional.”
“Pure local custodians that don’t have a global custody capability will find themselves short of global and comprehensive solutions to match clients’ expectations.”
In June, BNP Paribas and Tabb Group released a report, Safekeeping Empowered: Reimagining the US Custody Business, which noted that traditional custodians retain a certain image of being “pillared institutions vaulting securities, collecting income and calculating net asset values for funds”.
However, the modern custodian, the report argued, is in fact more of a technology-focused institution, and should be adopting and developing new means of attracting and retaining assets, lest they submit “to the perception”.
Francis Jackson, head of global client coverage at RBC Investor & Treasury Services, notes that, while custodians are managing their own new regulatory demands, they also have to cope with the demands from clients trying to stay abreast of their own regulatory obligations and market trends.
He adds that there are also changing perceptions around outsourcing, “with service providers moving further up the value chain of their clients”.
Jackson says: “As custodians, our role is to help clients understand how new pressure and new technologies are shaping the industry. We need to recognise that clients face pressure on fees and returns, investing in the appropriate areas that support client growth.”
And these clients are only becoming more clamorous, with their own cost pressures meaning they expect better services for their buck.
Bruno Campenon, head of the financial intermediaries and corporates client line at BNP Paribas, observes: “The angle has shifted to a situation where clients are asking what technology custodians have to offer, and how it can help them.”
“Clients are struggling with regulatory requirements, particularly with adapting their infrastructures around those requirements.”
This has led to changes in the balance between off-the-shelf and bespoke solutions, with the focus shifting further towards tailored services. While custodians may see a cost benefit from providing more automated services, clients are demanding more personalised features and a more individual approach to customer services.
Indeed, in the Tabb Group survey, customer services emerged as the top priority when selecting a new custodian, alongside value for fees, with both selected as the most important consideration by 18 percent.
These were closely followed by operational expertise, considered most important by 16 percent, while technology offerings came in only at fourth, selected by 14 percent.
Campenon says: “We need to think about industrialisation from a cost angle, but we need a different angle for more bespoke services, providing specific types of reports and specific access to information.”
“We are shifting to a mix of commoditisation and bespoke services, to add value to our clients and the clients of our clients.”
Jackson adds that asset managers are increasingly turning to providers for “enhanced capabilities”.
“In addition to the custody and fund administration services that we tailor to each of our clients, we are able to draw on our deep regulatory expertise and resources to monitor and provide them with insights into how forthcoming regulation will impact their middle and back-office operations.”
“While much of the traditional activities of custodians have become commoditised in recent years and many clients are looking for omnibus services to assist with regulatory requirements, there is still great scope to provide personalisation through the quality of the relationship and the service delivery.”
However, such provisions will require investment from the custodians, and these costs are likely to be passed to the clients, who will be unimpressed, to say the least, to see their fees on the up.
Campenon says: “It’s a bit of a stretch, because of the costs, but it’s also an opportunity. We have a tremendous amount of information available, it’s a matter of finding the right way to use that to the benefit of our client and their clients.”
He adds that this investment may be necessary anyway, simply to stay in tune with the movement of the rest of the market. Focusing on one solution, simply to find that market trends have gone in another direction, could be damaging.
“We need to make sure we’re not working on something completely different to what the rest of the market is working on. We don’t want to end up in isolation.”
Equally, RBC’s focus is on collaboration in order to remain competitive, and to adapt to the “changing operating environment”, Jackson says.
However, he notes: “At the same time, we also need to continue to invest in our people, helping them to understand changing working practices, training them with new skills and empowering them to dedicate more time to high-value tasks. It’s all about becoming more agile and collaborative in order to better service our clients.”
The survey asked clients what they wanted their custodians to invest in in 2017. The top priorities emerged as cloud computing and digital identity, with distributed ledger technology (DLT) and AI coming in third and fourth place, respectively, and big data and cybersecurity trailing relatively low on the bottom of the priority list. However, with regards to the technologies respondents think will have the greatest effect on operational efficiency, blockchain, or DLT, emerged as the biggest potential gamechanger over the next year, named by 33 percent, followed by regulatory technology, named by 27 percent. Big data analytics, again, is not considered to be a big factor in the near-term, with no respondents at all considering it to have an effect on efficiency within the next year.
However, looking ahead five years, the picture is starkly different, with blockchain, regtech and big data analytics named the most impactful technology by 33 percent of respondents apiece.
Jackson agrees that there will be an increasing focus on big data, which he says “has the potential to transform the custody and fund administration space and provide asset managers with meaningful insights for their own clients”.
He says: “Reams of client data is produced, but it is of little use unless insights and opportunities can be gleaned from it.”
RBC I&TS is therefore working on improving its data management capabilities, with a view to helping clients improve their distribution services, manage client assets, and “ultimately manage risk and cost more efficiently”.
Campenon, on the other hand, considers blockchain “more interesting”. Regtech is a necessity, and will therefore continue to grow, he says, and improving technology will only aid the development of big data capabilities, but blockchain is a more “compelling case”.
Although the survey results suggest the industry anticipates efficiency gains from blockchain in both the near- and long-term, Campenon suggests that development is not currently particularly evident in the market, in real terms.
He says: “I trust that firms are using blockchain, and familiarising themselves with what they can do with it, to ensure they don’t miss the trend, but it can appear that it is not evolving at all.”
“In five years’ time, we will have more detail around what can be done, more examples of what’s happening in the market infrastructures, and more experience in what works and what doesn’t.”
“I’m hoping that at that point it will be more representative in terms of technology in the market.”
He adds: “I’m not surprised that blockchain remains a high priority, but I am surprised it’s not more progressive.”
Jackson, on the other hand, has doubts that, even in five years’ time, blockchain will be developed enough to offer a feasible solution either for custodians or their clients.
He says: “Much has been said about what it can achieve, but there are question marks over the ability of disruptive technologies to achieve the desired operational efficiency and effective risk management that custodians and their clients demand, for at least another five to ten years.”
In the custody industry, as in every industry, the world is undoubtedly changing, and ever-more demanding clients expect their providers to keep up.
The US’s recent move to a T+2 settlement cycle has been a long time coming, and firms were prepared, however the Tabb Group report suggests there’s a feeling in the industry that “it’s only a matter of time until T+1 is mandated”.
This expectation, along with existing regulatory restraints, means there is even more pressure to come. The report says: “Automation of manual processing has always been an objective of financial services firms.”
“However, our research indicates that it is now more critical than ever if compliance with regulation such as T+1 and reduction in costs are ever going to truly happen.”
This demand for automation is likely to lead to consolidation in the industry, or to some custodians exiting the space altogether.
A huge 80 percent of survey respondents said they think there will be fewer custodians in the market in three years’ time. The other 20 percent say they think the numbers will remain the same.
Ultimately, on top of—and perhaps because of—regulatory obligations and pressure to invest in technology infrastructures, Campenon suggests that “banks need to become global in order to survive in the custody space”.
He says: “When a custodian has clients coming from a specific jurisdiction, it needs to abide by the rules of that jurisdiction. Custodians can no longer be niche players, choosing to be either local or regional.”
“Pure local custodians that don’t have a global custody capability will find themselves short of global and comprehensive solutions to match clients’ expectations.”
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