Asset Management in the Digital Age
As the world becomes increasingly digital, start-ups specializing in blockchain and fintech are transforming businesses across the board. Yet with constantly changing regulation and the need to compete with digital disruption, 2019 will be the year when regulation technology (RegTech) rises to the top of the agenda for the C-suite in financial institutions.
As with other financial sectors, RegTech in the Asset Management (AM)/Transfer Agency/Asset Servicing (TAs) sphere has the potential to seamlessly improve customer experience (CX), time to revenue and the end-to-end onboarding process for investors, funds and distributors. Ultimately, considering these key efficiency drivers, AMs can focus on what they are good at – raising new capital, retaining existing clients and delivering strong risk adjusted returns for their investors.
Let’s explore this sentiment in greater detail.
RegTech: What is the current state of play?
Although RegTech adoption is still emerging – at least at an institutional level – global organizations are eyeing the technology and its apparent return on investment keenly. According to Juniper Research, it is estimated that global RegTech spending will increase to $115 billion in 2023, up from just $18 billion in 2018. The same report argues that traditional compliance mechanisms will eventually begin to dwindle, subsequently forecasting that up to 40% of compliance budgets will consist of RegTech investment.
This makes sense, as according to a recent Fenergo global study examining the evolution of financial crime enforcement worldwide, more than $26 billion in AML, KYC and Sanction fines have been issued in the last ten years, Moreover, KPMG note that with global compliance procedures now costing organizations up to 15% annually, RegTech may enable firms to better detect and mitigate risk, reduce costs and liberate resources.
This viewpoint was further supported in a recent study by consultancy firm EY, where asset managers were asked about their views on RegTech adoption. 85% of the participants stated that the key motivating factor behind adoption is to improve efficiency.
In addition to safeguarding AM and TA institutions from the threats of regulatory red-tape, RegTech enables organizations to focus their resources on the end-client for a more positive and streamlined end-to-end onboarding experience.
Can RegTech reduce the AML/KYC burden?
The key driving force for RegTech to succeed in AM is for leaders within the business to appreciate its capabilities. This is no easy feat. Whilst benefits such as lower costs and reduced strain on resources are obvious, institutions are often more concerned with the legal and reputational implications of a compliance breach. This is especially pertinent when it comes to anti-money laundering (AML).
Financial sectors such as AM are already utilizing rules-based automated technology to streamline AML responsibilities, however their capabilities are somewhat limited. Whilst these algorithmic systems are able achieve a range of automated goals with respect to AML compliance (flagging transactions over a threshold, categorizing accounts or blocking transactions from certain jurisdictions) they still demand a significant amount of human input. Data must be manually reviewed.
On the contrary, RegTech solutions that utilize artificial intelligence (AI) are far superior. Instead of relying on an inflexible rules-based mechanism, AI-based RegTech solutions increase their scope on a continuous basis, identifying connections and patterns faster than humanly possible.
Nevertheless, recognizing the potential relationship between technology adoption and institutional reluctance, regulatory bodies such as the UK’s Financial Conduct Authority (FCA) and the Monetary Authority of Singapore (MAS) have stepped in to initiate change. In early 2018 the FCA issued a Call for Input on Digital Regulatory Reporting to explore how organizations can streamline regulatory obligations by utilizing RegTech. Interest from this segment of AM can further motivate institutions to lead by example.
Is collaboration key?
AMs and TAs are somewhat overwhelmed with the sheer quantity of regulatory changes encountered. For example, it is estimated that since 2009, G20-based oversight bodies have published close to 60,000 regulatory documents, meaning that compliance is not only complex and inconsistent, but potentially contradictory. These concerns are further amplified when one considers the global and somewhat borderless nature of the AM space as firms embrace digital practices.
For RegTech to play a major long-term role in the future of regulatory compliance, it requires support from the very top. Increased collaboration between Government and private sectors is also paramount.
Large Financial Institutions within the Corporate and Institutional Banking space have been early adopters in this regard. ING and The Commonwealth Bank of Australia ran a pilot RegTech scheme for obligations under the Financial Instruments Directive II (MiFID II) and which was overseen by the UK’s FCA. Although Ian Hollowbread, Director (Enterprise Office) of ING UK recognized that the pilot presented a range of challenges with respect to widespread adoption, significant benefits were also identified. However, Hollowbread made it clear that for these outcomes to be realized, there needed to be a united front between industries and regulators, with RegTech bridging the gap. AM firms can learn from this experience and replicate.
Fenergo work collaboratively with our clients to ensure that all regulatory compliance and entity data management requirements are met fully and transparently. Fenergo runs several client collaborative forums such as Client Advisory Boards and Regulatory Forums. The Fenergo Regulatory Forum is a community-based forum that meets regularly to discuss and debate current issues across topics including OTC reform, tax, AML/KYC, global investor protection and data privacy. With a Regulatory Forum representing each sub-vertical in financial services such as asset management, these forums consist of a steering group supported by sub-advisory working groups. Members of the steering group are typically compliance and legal professionals, together with onboarding and data management colleagues; they’re the people with their fingers on the pulse of the latest regulatory developments and have a deep appreciation of what these changes may mean for the financial services industry. The Forums allow for co-creation and deliver a ‘Compliance by Design’ process to financial institutions.
What will this mean for investor onboarding?
The grand vision for RegTech amongst AMs embarking on digital transformation is clear. Compliance is made simple and automation results in a substantial reduction in costs. If national regulators play their part; reporting processes can be significantly streamlined. But what will RegTech implementation mean for the investor onboarding process?
First and foremost, it is important to recognize the importance of the end-to-end onboarding experience from the perspective of the investor. According to a 2017 study by KPMG Nunwood, AM firms that prioritize a quality customer experience achieve revenue growth at twice the rate to those that don’t. More specifically, just two organizations that took part in the study felt that they were providing a good onboarding experience for clients.
RegTech has the potential to streamline the onboarding process and deliver a superior client experience by digitalizing the entire client journey from the very first touch point to routine trading. A positive digital customer experience from the get-go allows for faster onboarding and time to revenue, ultimately achieving a more profitable client lifecycle. For this to be achieved RegTech utilizes a range of innovative technologies ranging from natural-language processing, biometric and social verification and robotic process automation. In doing so, global research provider, Gartner, argues that RegTech can reduce the investor onboarding timeframes from days to just minutes, resulting in a vastly improved customer experience.
The same report also noted that successful implementation of RegTech could see AM firms not only improve screening results but allow staff to focus on the delivery of value add services.
Conclusion – where will 2019 take us?
Although it may take some time before we see a RegTech roll-out across the AM and TA space in its entirety, the tide is changing as AMs and TAs embark on digital transformation strategies.
As with the rest of financial services, AM is evolving and to thrive transformation is paramount. With challenger banks disrupting the state of play, customers expect and demand a seamless customer experience and interaction through digital channels where data is centralized. Where possible AMs should look upon regulatory change and their associated requirements as an opportunity to pivot to new digital business models and to differentiate themselves from their competitors by offering additional value-added services.
Nevertheless, collaboration is key. If the RegTech industry can bridge the gap between national and regional regulators, within that of the AM sphere, then the outcome could be very lucrative for allparties involved.