Lee Godfrey, CEO of Kneip, talks to Funds Europe about the importance of data accuracy and distribution oversight as firms seek to enhance efficiencies and controls in the middle and back office.
While as an industry we started talking about MIFID II and PRIIPs back in 2014, we nonetheless saw a crescendo of activity at the end of 2017 among fund managers, insurance companies and banks. The market knew the MIFID II implementation deadline was coming, yet pretty much everyone – including the regulators – left things to the last minute.
Considering that parts of the regulation was interpreted differently across markets, be that Luxembourg, France, Germany or the UK, it is fair to say that there was not enough time allocated between publication of the final regulatory guidance and the implementation deadline.
Given a lack of knowledgeable resources to help manage that crescendo of activity when it arrived, it is clear the process should have been better planned. While clients typically hit the regulatory deadline and achieved what was required to satisfy the regulator, there is inevitably some fine-tuning still to be done.
Those difficulties aside, both regulations seek to open up an opportunity to enhance transparency between the manufacturer of the investment product, the end adviser, and the end investor. As the manufacturer or producer, you should know who is selling your product to the end investor; there should be total transparency around that flow of data.
However, we’ve yet to see the market really adapting to that. Have all distributors started sending back negative target markets to asset managers? No. That is in part due to the fact that everyone is still getting properly up to speed with the new regulatory environment. However, it is also down to the presence of what is arguably too many intermediaries in the distribution chain.
If you have seven intermediaries between the producer and the consumer, for instance, the challenge is how best to ensure that the required target market information is received by the end consumer, and the investor information flows in the reverse direction back to the producer. That gap is still to be bridged, though it will happen in the near future.
Did the impetus behind the regulations come from the correct perspective? Did we get the final solution right? That is up for debate. It is likely we will see some fallout as the market responds to the new rules; and while regulators may have taken their foot off the pedal when it comes to initiating sanctions or investigations, at some point they will start looking at how firms have responded and adapted their practices.
At the end of the day, there is only so much data associated with a product, be it a fund, an insurance wrapper or a structured product. However, a regulator will be looking at that data from a range of different perspectives. Certainly, in some cases you will be dealing with different regulators in different markets, but more often it is the same regulator – but you are dealing with different departments within that regulator.
Is their focus product governance – does the product do what it says on the tin? Is it investor protection – should this investor be exposed to this product? Is it distribution oversight – is the product being sold appropriately and to the right people? For each of those scenarios, the regulator will want the data cut in a slightly different way, though there will inevitably be a degree of overlap between those different perspectives. The ideal solution would be a tool for the regulator that allows them to slice and dice the data themselves, rather than having the firms manage it. But it seems unlikely there will be sufficient uniformity across all regulators to attain that utopia.
Finding a match
When it comes to distribution, the industry must recognise that in the future, historical models will inevitably evolve. From the perspective of a producer/manufacturer, it will become ever more important to be able to effectively navigate those new distribution chains to retrieve the data you need.
Clearly defining your target market, setting up and properly understanding your distribution network, having oversight of your intermediaries – these will all become ever more important considerations. Even more important, though, is ensuring you can gather information back from the end investor to confirm that the target market does indeed match the characteristics of that investor.
Elsewhere in the chain, innovation around fund registration presents opportunities to reduce time to market, which means the investors get to invest earlier, the cost is much lower, and transparency between the product owner and the investor is enhanced. It is no longer just about making the middle and back office more efficient. Rather, it is about accelerating the front office – accelerating the creation of products as well as their administration.
The new generation of digital platforms ensure both that data is at the centre of everything and that the source of that data can be trusted. That data will inform and facilitate distribution strategies, regulatory compliance, contractual requirements and marketing imperatives.
While the industry has grown up to encompass a conglomeration of disparate legacy systems, both in-house and sourced from external partners, looking forward, the focus for firms will increasingly be on how to transition to one data partner, and who that partner should be.
For data partners themselves, the opportunity is to help guide our clients towards and through this inevitable transformation.
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