Olivier Lens of the Society for Worldwide Interbank Financial Telecommunication (Swift) discusses the ongoing push towards greater transparency in fund management.
Since the regulators’ response to the financial crisis started to take shape, the financial industry has been talking about regulation. We heard about the ‘tsunami of regulation’ hitting us, and the discussion gradually shifted to an acceptance that regulation was here to stay and that even more was likely to come.
Consequently, all players have tried to understand what the regulations required, and what the impact would be on operational and business models. ‘How to survive in the brave new world of increased operational cost and reduced margins’ became the conference theme of choice.
I believe our industry is now in a new phase, which goes beyond talking about regulation. Clearly this is in part due to the regulatory impact, but more accurately I think it is the result of the combination of regulation and increased investor awareness. The defining element of this new phase is transparency.
In the fund management industry, there is a growing need for information and ‘big data’. It all starts with ‘know your customer’ (KYC). In a marketplace characterised by a long chain of intermediaries and outsourced models, the fund manager needs to make sure
that the investor is allowed to invest in the fund. This also puts the spotlight on existing distribution models.
In a world in which inducements are banned, fund managers need to build a view on distribution channels in order to develop a better strategy for marketing new and existing funds. As a result, data is becoming increasingly important – but today, that data is highly fragmented. Only greater transparency within the value chain will enable fund managers to be more effective in the future.
ACTIVE INVESTORS
This demand for transparency is not only the concern of the fund manager but is also shared with the investor. Whereas before, the investor was only interested in creating yield, today the investor wants to have a better understanding of the underlying characteristics of the fund. How are the fees calculated? How is the performance calculated? Is this investment a high or a low risk?
Investors are already demanding and will become even more so from a product perspective, but also from an accessibility perspective. Investors want to order funds from their mobiles with immediate execution and to track performance in an easy and understandable way.
If you look at the amount of manual intervention involved in funds dealing, I think it is pretty clear that our industry is not yet geared up to support this requirement.
The increasing need for transparency is a given, and awareness of this is improving, but there are still a number of hurdles to overcome. In order to create transparency, we need to look at the full value chain of the funds industry.
That’s also why transparency is the new talking point – because it embraces a way of managing funds, whether that is in the back or the front office, at a transfer agent or a platform or a distributor.
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