Q&A with Andy Chesterton, Chief Operating Officer – Global Transfer Agency
How would you differentiate TA services in Europe from Asia or America?
The USA is a large, wealthy, and homogenous market with a single currency, a single regulatory regime and an integrated banking and payments system. For the majority of its growth heyday, there was also a single consumer language. US transfer agency (TA) providers were able to leverage the scale of that single market to invest earlier and more heavily in technology than their counterparts in Europe and the developing world. The market has amortised that investment over a much larger investor base leading to lower administration costs and typically lower fund annual management costs (AMC). The massive investment made by early entrants represented a significant barrier to entry to other players and the market became concentrated in the hands of a few large TA providers.
Europe by contrast traditionally had a funds market which was separated into national silos distinguished by different currencies, regulations and tax laws, customs and practices as well as many different consumer languages. For systems and administrators to be successful in multiple European countries they had to develop different systems and TA process models for each specific domicile. The EU, with some degree of success, has made significant strides to try and consolidate this fragmented market. The introduction of the European Single Currency swept away foreign exchange issues for the participating countries. The various UCITS directives have provided an EU wide funds regulatory regime which continues to edge the EU funds market towards the nirvana of a free and fair level playing field for cross border funds marketing, although this has not yet, achieved that goal.
To date the biggest beneficiaries of the UCITS brand have been the offshore, cross border markets of Luxembourg and Dublin rather than the domestic national European funds markets. The UCITS IV directive in particular, provides many of the enabling regulations that will permit EU fund managers to market a single central fund range freely across Europe rather than having almost identical separate fund ranges in each separate domicile. It is likely to take several years for fund management groups to make the huge structural changes required in order to achieve this. It will also be dependent upon a more harmonised approach into the taxation implications of merging existing separate fund ranges. Until then the EU TA market will continue to be more fragmented and/or more expensive to operate in compared with the US.
Most recently, the European TA market has also seen a significant investment in TA technology – both in the core TA dealing and registration engines and also in surround ‘enabling’ technology. This includes STP messaging engines, image and workflow systems and browser based web front ends for investor and agent access. The level of investment required to create and maintain such expensive and integrated systems environments has driven a trend towards the use of third party administrators (TPA) and packaged solution providers.
The Asian funds market is totally fragmented along national lines and despite one or two fledgling initiatives, has no realistic chance of moving towards a homogenised single market in the foreseeable future. Many Asian markets are characterised by protectionist barriers to entry and/or arcane, overly bureaucratic local regulatory requirements which make it difficult to operate TA efficiently. Despite this, the potential size of some of these individual national Asian markets and the rapid emergence of huge wealthy middle classes within them are making the region an attractive target both for Western Fund promoters and for new domestic providers. Some of the larger Latin American countries, particularly Brazil, would also fall into this category.
The trend towards using common service providers, which is well established in the more mature markets, is still in its infancy in these emerging markets.
What are the challenges in increasing automation in the region?
Europe’s fund industry has moved forward with automation of functions like processing and settlement of fund orders, further boosted by initiatives such as the Findel ‘single legged transfer’ standard in Luxembourg or the TISA led UK platform to platform re-registration SLAs. Fund management companies and third party administrators in both domestic and cross border environments are using flexible TA systems like Bravura’s GFAS to ensure extensive functionality and improve operational efficiencies via automation. Challenges remain in Asia, but with wages increasing in countries such as Hong Kong and Singapore, the costs of manual processing are rising at a time when the expense of automated processing is falling.
What are the latest developments to affect the transfer agency industry?
One of the key challenges facing the transfer agency industry will be the increasing data-driven demands from regulators, clients and investors. The data theme will be reflected in a continued growing demand for surround technology solutions, such as web front-ends and data warehouses that break down isolated silos and consolidate data from multiple back-office systems.
The increased focus on regulatory change over the last couple of years will continue in 2013, as further regulation is finalised by authorities in the UK, Europe and the US. The challenge to regulators is to achieve an appropriate level of insight so the market becomes more transparent but not less efficient. For TPAs and fund managers, understanding the impact regulations will have on their business, their investor base and the overhead required to support and implement these will continue to be a priority. The cost of keeping systems and processes current with all of this new regulation is also likely to be a driver in the continuing trend of outsourcing systems and administration.
Do you think it is advantageous to outsource transfer agency functions to lower cost labour markets?
Our clients have used Bravura technology, in particular our integrated image and workflow capability, to assist in successfully moving extensive amounts of their day to day TA processing to lower cost ‘offshore’ data processing centres.
Although the technology to seamlessly move work items and their associated documentation back and forth across continents is an absolute pre-requisite for a successful offshoring exercise it is also vitally important for the administrative framework to be clearly mapped out and understood by all participants. Extensive top-down management focus must be concentrated on getting the organisation to make an essential culture shift to make the offshoring process work.
Benefits to offshoring include time-zone advantages which ensure service can be provided around the clock. Cost is an incentive to offshore as well, but only certain components are fit for this purpose e.g. non-client facing functions. Price reductions and service improvements can also be realised. It is however important that senior executives are visible to maintain the standards expected and that clients do not see any deterioration of service.
With clients looking to merge their funds located in different domiciles, how will consolidation of this kind affect the industry?
The UCITS IV directive’s aim was to provide a more efficient and flexible fund sector with significant distribution benefits and lower overall costs. However, early indications are that 18 months after implementation, the full benefits are yet to be felt. Take-up of the management company passport, and the number of fund mergers haven’t been as high as forecast. Certain tax implications and accounting standards needs to be considered, and the costs are considerable. A number of EU members are also lagging behind with implementation.
There is potential for very substantial savings in portfolio management and fund accounting if multiple separate but similar fund ranges can be collapsed into a single, centralised fund range.
Whilst it is technically possible for that single centralised fund range to be marketed cross border and for the TA to be administered centrally, it is more likely that the distribution will be via domicile specific feeder funds with local TA administration and customer servicing. This will make the product appear to its consumers more like a domestic brand. The localised TA administration of the feeder funds could still, however, be performed on a centralised TA system which would make the automation of the roll-up into the master fund and activities such as intra-day cash flow forecasting for the master fund (with look through into feeder fund activity) much easier.
The UCITS IV directive also permits a greater degree of flexibility as to the location of administration and portfolio management staff. This is likely to lead to a continuation of the trend towards locating large elements of back office administration to cheaper offshore locations such as India. It also means that the domiciles locating the centralised master funds will not necessarily also win the high value portfolio management jobs that go with it.
Is the move towards European harmonisation having an effect on the sector?
The UCITS brand has been a resounding success for Europe’s fund industry but as discussed above, the cumulative weight of UCITS directives has still not achieved a truly level playing field, with funds from one EU member state being freely marketable across all other EU member states. The full benefits of this legislation are likely to take several more years to materialise.
What UCITS IV has highlighted though is that differences in tax treatment across member states together with differences in consumer protection laws, distributor remuneration policies and domestic tax incentivised products are likely to provide further barriers to harmonisation above and beyond funds regulation itself.