For the fund sector, 2012 was a year of regulatory reform mixed with controversy and uncertainty about the future. This trend looks set to continue into 2013 as financial services institutions look to strike the right balance between innovation, ensuring regulatory compliance, maximizing operational efficiencies and improving the customer experience to maintain a competitive advantage. Aubrey Nestor, head of Product – Transfer Agency, at Bravura, rounds up the key issues and developments of the last year, evaluating the resulting technology requirements, and looks at how 2013 is shaping up.

Europe – Preparing for the Fallout From the Eurozone

The eurozone crisis has stuttered along for so long without a solution, it almost feels like the norm. But the drawn-out nature of the situation has meant that technology providers have had plenty of time to prepare for the likely eventualities associated with one or more countries exiting the euro.

If and when it comes, the speed at which a country exits from the euro is likely to be far quicker than the time period that was allowed for these currencies to originally merge into the euro. As 2013 ushers in new uncertainties, it is important for transfer agents and their technology partners to keep their contingency plans up to date and ensure that key personnel are up to speed and ready to implement the plan at short notice. Scenario planning to ensure they are ready for various eurozone scenarios, identifying potential exposures and moving to mitigate them should already be complete or underway.

From a transfer agency (TA) perspective, there are two key components to such a change. The first, and easiest to automate, is the redenomination of a fund into a new currency. This will involve setting up the new currency as a valid tender on the system, creating a new version of the fund denominated in that currency and then performing a capital event to move existing holders from the euro version of the fund to the new version. This is essentially the reverse of what most providers did when originally merging into the euro. Clearly a system that can support funds denominated in multiple currencies is a base requirement here.

The second aspect is more difficult and relates to investors who have bank mandates set up on the TA systems that are currently euro denominated but which will change to a new currency as a result of their home country withdrawing from the euro. These mandates may belong to investors in funds, which will not themselves be redenominating (e.g., a Greek investor investing in a Luxembourg-domiciled fund). Identifying the potential subset of impacted bank mandates is problematic, and this is compounded by the fact that the redenomination of these investor bank accounts may involve a change in the bank account number and/or IBAN code. This can’t be derived systematically, and it will need to be supplied by the investor and manually updated by the TA.

UCITS IV – Dealing With the KIIDs

UCITS regulation has continued to be a major focus for all European fund managers as regular revisions of the framework take place. EU countries originally had until July 2012 to adopt the UCITS IV regulations, which incorporated the pre-sales Key Investor Information Document (KIID) requirements. However, acting on feedback received from the industry, the FSA has, as an interim measure, decided to extend the deadlines until May 2013, allowing the KIID to be sent to U.K. investors as a post-trade document with a contract note.

This measure is an interesting move considering that in a separate development the proposed Packaged Retail Investment Products (PRIPs) will see the implementation of a KIID-style document (which they refer to as a “KID”) extended to all retail investment products from 2014. This new PRIPS KID document is likely to supersede the existing UCITS IV KIID. As such, the industry is eagerly awaiting further information as to how the new document will differ in terms of content, and when and by whom it needs to be delivered to the investor, before commitments to new technology and processes are made.

Some vendors, like Bravura, have seen a need for TA system enhancements to address the initial KIID requirements to track whether specific individual investors require the KIID to be provided by the fund promoter with prompting, where required. There is also a requirement for confirmation that the KIID has been provided prior to dealing or regular investment setup.

Retail Distribution Review (RDR) and Share Class Conversions

Six years in the making, the FSA’s era defining RDR is impacting firms across the retail investment market. In preparation for the RDR deadline of Jan. 1, 2013, fund managers and product providers have needed to have in place functionality to permit them to facilitate the collection and payment of adviser charges from investor accounts on behalf of the investor’s agent. This allows the handling of pre- and post-RDR retail business effectively in the new environment. Key to managing the change has been technology functionality, which enables the process of both commission and fee-based transactions for new investments while continuing to manage legacy commission for existing business.

As a consequence of RDR, fund managers are launching a large number of new “low-AMC” share classes alongside their existing higher-AMC share class equivalents. In 2013 this is likely to generate a large number of requests for share class conversions from high-AMC to low-AMC equivalent share classes. Significant increases in volumes are expected to hit within the next three to six months.

Responding to the operational implications, the IMA published best practice guidelines for the processing of share-class conversions on TA systems and their reporting and interfaces to related fund accounting systems. Failure to process transactions in accordance with these IMA guidelines could potentially cause fund accounting errors in the values and tax positions of the source and incorrect box profit and loss positions.

Subsequent industry consultation revealed that few, if any, U.K. TA platforms process share class conversions exactly in accordance with the IMA guidelines. With this in mind, the early part of this year will see firms working with user groups and industry bodies to review these guidelines and find solutions for compliance.

Re-registration – Greater Flexibility for Investors

Also as of Jan. 1, 2013, investors are able to freely move their assets between platforms without making interim conversions to and from cash. Previously, most providers did not support such “in specie” transfers, instead forcing investors to liquidate their assets and transfer the resulting cash to the new provider. This resulted in investors being burdened by dealing costs and the hassle of selling and then rebuying their assets with the new provider. It also often left them out of the market for an unacceptably long period. Even those platforms, which did support in specie transfers tended to operate inefficient manual processes, which could often take weeks or months to complete the transfer.

TISA, acting at the FSA’s request, has produced a voluntary set of service-level agreements (SLAs) for both in specie and cash-based platform-to-platform transfers. The FSA has signaled that if platforms fail to meet these voluntary guidelines then they will regulate to impose mandatory agreements. They have also indicated that they expect the initial SLAs to be progressively improved and the transfer timescales shortened in the future – the time required for re-registration currently stands at a rather lengthy 11 days, for example.

TISA Exchange Limited (TeX) has organized a multilateral contract club and has provided a set of messaging standards that together will provide the legal and technical framework necessary for platform providers and their underlying fund managers to automate platform-to-platform transfers.

Whilst it is not strictly necessary to provide an automated solution in order to meet the current SLAs, larger platforms processing huge numbers of such requests may well find it difficult and/or expensive to meet the requirements using manual administrative solutions. Re-registration volumes are expected to be relatively strong, and an increase in demand is anticipated once investors are aware of the flexibility now on offer.

FATCA – Delayed But Not Going Away

The Foreign Account Tax Compliance Act (FATCA) was signed into law by Barack Obama in 2010 with the aim of recovering some of the estimated $100 billion that the U.S. Internal Revenue Service (IRS) says it loses every year to tax evasion. The regulation was due to be implemented this year, but the initial deadlines have recently been pushed back to January 2014, giving institutions an opportunity to better coordinate the implementation of FATCA procedures globally.

The U.K. government has already signed an intergovernmental agreement (IGA) with the United States to implement FATCA. France, Spain, Italy and Germany are also in discussion, as are more than 40 other countries, with further agreements expected to be in place shortly. The key common theme all of these IGAs is that they remove the need for fund managers in those countries to operate a FATCA withholding tax on redemptions and distributions, replacing it with a requirement to report, via their domestic tax authorities, details of transactional and holding data for investors who exhibit indicia that suggests they may be subject to U.S. tax.

The downside of these IGAs is that although each IGA is likely to be simpler than a full-blown FATCA withholding tax regime, they are each going to be subtly different from each other. For institutions operating in multiple jurisdictions and managing funds all over the world, slightly different software solutions might be required for each national IGA. There is also the prospect that TA software may still need to additionally support the full-blown FATCA withholding regime for those countries that do not enter into an IGA with the U.S., but this danger is receding as more and more key fund domicile countries jump on the FATCA IGA bandwagon.

One interesting potential scenario is that, if FATCA is seen to be a success for the U.S., then other countries may decide to create their own FATCA-like regimes in order to ensure that their own citizens do not avoid domestic tax by placing their investments abroad. For instance, a U.K. Treasury Select Committee has discussed (but not formally proposed) the idea of operating a FATCA-like regime for U.K. investors who have investments in the Channel Islands.

2013: Striking the Right Balance

The increased focus on regulatory change over the last couple of years will continue in 2013 as further regulation is finalized by authorities in the U.K., Europe and the U.S. One of the key themes 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 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. With a focus on maximizing operational efficiencies, Web-delivered solutions that offer convenient, time-saving access to customized data and optimized reporting can provide fund managers and administrators with an enhanced service offering and a significant competitive advantage.

In the U.K., the post-RDR world is expected to see an increase in self-servicing by direct investors. Institutions that provide specialized retail portals can track investor activity, delivering targeted product messages as they look to retain and boost assets under management. Demand for mobile device-enabled versions that meet the growing demand for information on the move is also likely to be high, bringing TA into line with other financial service offerings, such as retail banking.

Further investment in automated messaging as a means of increasing efficiency and eliminating costly human errors will also reap rewards. Industry initiatives such as the Findel “single legged transfer” standard in Luxembourg or the TISA-led U.K. platform to platform re-registration SLAs will drive further demand for higher levels of automation in the processing of investment funds. Initial implementations are likely to be semi-manual, but, as volumes increase, there will be a commensurate interest in fully integrated STP solutions.

Those financial institutions that can achieve the right balance between regulatory compliance and service innovation will be well placed to capitalize on growth opportunities. Crucial to their success will be efficient and agile technology solutions that deliver real value and a long-term strategic advantage.

About the author

Aubrey Nestor

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