On Investment Data Quality Matters…

I think that surveys are a fascinating insight into people’s views on what’s happening in the marketplace. We try to conduct a survey at least once a year on current trends in data management. Last year, our survey focused on what people’s challenges around data management were and this year, it was all about regulation. We decided to focus on regulation because as far as I’m concerned it seems to be all people are talking about – they’re talking about KIID, Dodd Frank, FINRA, fines, compliance and many are not really sure about how new regulation is going to impact them or what lies ahead.

 The global regulatory community has come under a lot of flak since the 2008 market implosion. In many regions, the regulator has been disbanded, restructured or at the very least forced to report to government led investigative committees. The charge levelled is that they failed to maintain a stable market by not having a clear view of the systematic market risks that were at play. The industry itself also had a role to play in the demise of the previous boom – as employees were incentivized to take on risk without the appropriate checks and balances to measure and mitigate exposures. Additionally, operating models did not keep up with the rapid change of the industry landscape – leaving behind a legacy of manual error prone processes and key knowledge data sets that were poorly maintained. In doing so, the industry and regulators to a large extent left the public to carry the can. So it is not without reason that the media and investment community alike are keenly interested in the regulatory backlash that can be expected in response to the financial crisis. Regulation was always a driver within the industry, but more recently its prominence has increased because the fines are getting bigger, and the reputational damage is all the greater, for the increased coverage being delivered by the media. Understandably, the regulators are now focused very firmly on managing market stability and ensuring the industry is treating investors fairly. From the “Know your product and client” perspective – the key focus here is that investors should be sold the most suitable product for their particular situation. The regulator (and I refer to them in general terms here) – is looking for accuracy and timeliness – and they are looking for consistency across all public communication of data – be that – printed fact-sheets, micro-sites, or institutional client reports. Sales and marketing material for investment products is coming under increased scrutiny – the regulators are increasingly treating such material as disclosure of material fact, where as in times gone by, firms were not being held to account to the levels they are today, vis-a-vis the information disclosed in such documents. Anyway, that’s some background … and I will post a blog on what the individual regulations are about in each region but on to a little more about our survey. We usually conduct our surveys at industry events such as NICSA, ICI General Membership Meeting, TSAM in Europe and also online. We presented the results in a webcast on April 13th and also in a press release which you can access here.

The objectives of the survey were:

•  to gauge industry insight on regulation

• to learn how prepared these organizations are for the impending changes

• and how will it affect firms data management processes and strategies into the future.

 The drivers for the survey should be obvious to us all – many organizations are actively assessing their target operating model with a view to adapting themselves for upcoming regulation, on top of this you have the rising spectrum of reputational damage due to increased media scrutiny and the fact that data management is now a standard item on the agenda for corporate risk assessment.

66% of the survey respondents were from North America (primarily USA) and 33% from Europe.

The first question on the survey was: “Would you say that the product data you distribute to the market is; always accurate and timely, usually accurate & timely, rarely accurate & timely, or, you don’t know” and I’ve put together a quick pie-chart of the results below:

What was interesting from the response was that just less than one quarter of respondents indicated that their product data was always accurate and timely, although nearly two-thirds indicated their data was only, usually accurate and timely. What can we take from this? Well it seems that most of the time asset managers product data in the public domain, is in the main accurate and timely, but, for two-thirds of asset managers, there are periodic issues with either getting their data to market in a timely or accurate manner. This is really highlighting something we already know – getting your product data into the public domain so that you have a high degree of confidence in its accuracy is not a simple solution to solve – even though this is your own information? The predominance of manual processes that deliver data from back and middle to front office is probably the core reason we see this lack of confidence. Anywhere that you have manual processes, it leads to a lack of repeatability, inability to create a systematic audit trail and a breakdown in confidence in the ability of the machine to operate under full load. What is clear is that regulators do not want to see such environments – specifically we have heard from some of our own clients that recent SEC exams focussed heavily on the ability to demonstrate repeatable and auditable processes where data was being pushed into the public domain and facing off to client investors.

The next question was “in the US and North America, which of the following regulatory discussions is your firm most concerned with? The Dodd-Frank act, the Point of Sale fund fact regulation in Canada, the reforms of the Money Markets, the 12b-1 reforms or recent FINRA interjections”

The response was hardly surprising – just under three-quarters of all respondents indicated that Dodd-Frank was at the forefront of their firms concerns when it came to discussions on regulation. It would have been surprising if the result were any less – Dodd Frank is a behemoth act, the impacts and true force of which are not even fully realized yet. I was surprised that FINRA did not feature higher than a fifth of respondents’ concerns – in particular when you consider the amount of cases they have taken recently. Even though the SEC reforms of the US money markets is to an extent yesterday’s news, it was interesting to note that nearly a quarter of all respondents indicated that these reforms were still a discussion point of concern within their firm. While the fact that a third of respondents are concerned with the ongoing trials and tribulations connected to the 12b-1 fees is not a surprise either – anything that impacts the commercial model that impacts distribution and compensation of brokers means a lot of upheaval in existing operating models. Finally the fact that only 8% of respondents are concerned with the POS Fund Facts regulation in Canada should be balanced with the knowledge that the majority of respondents were US firms which had limited exposure to Canadian investors.

This blog is getting very long…. so I will keep the results of the rest of the survey for the next post!