For those of you who missed the recent webcast on regulation and its impact on data management strategies in the investment fund world, it is available for playback here…
I am hosting a webcast on “The Impact of Upcoming Regulation on Data Management” on Wednesday 25th July 2012, 3pm BST, 10am EST.
Regulation is a key challenge in the industry and in an unprecedented age of openness and transparency continues to be the no. 1 driver for asset managers investing in data and reporting initiatives. Companies want to mitigate the risk of inaccurate information being in the public domain and many are embarking on data management projects – which will save time, reduce errors and automate processes. The key themes we see center on capability to deliver a systematic, repeatable and auditable data publication process for client-facing data.
This webcast will be presented by myself, and will focus on how upcoming regulations will impact the industry and how asset managers need to prepare to ensure they stay ahead in a highly competitive market. Specific topics to be covered include: the latest version of AIFMD, the final throes of the Retail Distribution Review, the latest on KIID for PRIPS, UCITS V, how being important or “SIFI” is no longer so desirable, Volcker, FATCA and last but certainly not least Pillar III of Solvency II.
Finally, I will touch on what is around the corner and run through some recommendations with respect to preparing for the swathe of upcoming regulatory change.
To register for this webcast please click here.
I look forward to welcoming you online on July 25th.
Following my last couple of blogs on the results of our survey around data management and regulation, I said I would post some information about the various regulations in each region and how they were likely to impact..
In North America, the regulators have always been to a large extent more rules than principles-based – this is not going to change – and – in the future we can in fact expect even more rules – not less.
The US alternatives space has seen many changes, particularly around registration, where many hedge fund managers now required to register with the SEC would previously have been exempt – this is causing many European hedge fund operators to consider their long-term strategy in the US. The implication of registration is that full books have to be maintained. Each firm must retain all data, and be able to produce records for SEC inspection. SEC examination is a particularly onerous process – with site visits, extensive questionnaires and vast demands for data.
The movement of the Dodd-Frank bill through the senate in summer 2010 ushered in a new era of regulation in the US, and we expect to see major changes to issues such as corporate governance, executive compensation and levels of disclosure and transparency. What we do not know yet is how the bill will directly impact the many rules we expect to see the SEC deliver, but we do know that the bill will allow the regulators to wield significant power and to determine the level of impact it will have on the market.
With the establishment of the Financial Stability Oversight Council and the Office of Financial Research, there is likely to be a more active approach to the management of market risk. This will manifest itself in increased reporting by asset management firms and funds on areas such as financial accounts, performance data, concentrations of risk and exposures to third parties. Increased demands for disclosure and transparency, including filing of full portfolios could also be seen, and there may also be demands for SEC mandated slices and views of the portfolio breakdown. Recent changes by the SEC to Money Market funds with the updates to 2a-7 are perhaps the clearest insight we have as to what to expect for the broader investment fund market – based on what we see in 2a-7 we might expect to see more rules on post trade compliance, public information filing and risk exposures.
Meanwhile, FINRA will be continuing to focus on maintaining market integrity, protecting investors and implementing key strands of the Consumer Protection Act within the Dodd-Frank reforms.
In Canada, a large segment of the industry is focussed on the new ‘Point of Sale’ fund fact documents which must be presented to investors prior to writing any investment from as early as July of this year.
European regulators are moving toward the North American model of regulation. So what was mostly regulation by principle will become regulation by rule. Tensions and strains within the EU came to the fore with French led demands for a move away from ‘light touch’ to ‘heavy touch’ winning out. Ironically though, the UK regulatory environment is probably the most rules-based of the current batch – I think it will become even more rules oriented , especially now that the FSA comes under the remit of the Bank of England.
Most discussion in the City these days though is about RDR and how the removal of commission incentives is re-shaping the sales/advice arena , with many Asset Managers now actively looking at IFA businesses and other distribution channels to give them access to the market.
On the cross-border front, the big news is the UCITS IV directive, and from a data management perspective the key discussion point is the KIID – or Key Investor Information Document. The KIID much like the CSA’s Fund Facts, is a simple 2-page document that should be delivered to the investor prior to investment. With KIID I see some serious data management challenges, in particular with the scale of the narrative data management, while the quant data should be more straightforward to deal with. To complement the rollout of the KIID initiative, Germany has passed legislation mandating the delivery of ‘product information sheets’ for investment products which are not covered by UCITS IV.
On the offshore side of things, we are already seeing change in Luxembourg and Ireland – in particular Ireland where we have seen the arrival of Matthew Elderfield, a former FSA department head.
The rise of the ‘Newcit’ – ostensibly a hedge fund in UCITS clothing – is creating a lot of regulatory discussion – while welcoming the on-shoring of some hedge funds, it is thought that many of the ESMA regulators hope that hedge funds will migrate towards the Alternative Investment Fund Managers Directive.
That’s a quick summary of the regulations I think will impact reporting and therefore might cause data management issues. We’re still seeing regulation as the major hot topic at industry conferences – everyone is talking about it and trying to get prepared for change.
This piece is a follow-up to my most recent blog posting on the results of our recent “data management and regulation” survey. I think the survey gave us a good chance to get a snapshot of what people are concerned about in terms of upcoming regulation and how it will impact their business processes.
The last posting was getting very long so I only posted some of the results. I finished up talking about the regulations that people were most concerned about in North America. The third question in our survey concerned European regulation and the topical issues there.
The question was: “in Europe, which of the following regulatory discussions concerns your organization most: RDR in the UK, UCITS IV & KIID for cross border funds, AIFM for hedge funds, the rise of Newcits, the upcoming UCITS V directive or the changeover from CESR to ESMA?”
Not surprisingly nearly two-thirds of all respondents indicated the big discussion point in their firm was UCITS IV and KIID – if anything the surprise is that it did not have a higher response. Maybe this is because many firms have focussed so heavily on preparation that they are very confident they are well placed to deal with the upcoming requirements that UCITS IV brings as well as the ability and readiness to initiate publication of KIID documents.
Nearly 30% of respondents indicated the AIFM directive, and an additional 17% indicated Newcits were items of discussion and concern in their firm – a clear indication that alternative strategies and the hedge fund industry are key industry focus points in the years ahead.
Somewhat surprising though is the fact that UCITS V is already a discussion point for 17% of respondents – the belief here is that the depositary structures that facilitated Madoff and manager remuneration are going to be addressed – these topics will ensure this is a hot topic of conversation for years to come.
Finally 17% of respondents indicated Solvency II was a key discussion point – this will become a key topic of conversation for any asset manager that has mandates emanating from the Life and Pension sectors – the demands on risk control, asset liability, ability to be transparent and report accordingly are all hot topics in the Sol 2 world.
Next up was the question: “How prepared is your organization for dealing with upcoming changes in regulation - are you totally prepared, somewhat prepared or not at all prepared?”
Thankfully the vast majority of respondents are at least somewhat prepared, but surprisingly only 15% or so indicated they believed their firms were totally prepared.
So it seems like the adage – a lot done, but more to do – seems prevalent here. Most firms are aware of what needs to be done, they have plans in place, but in some cases these plans have not been fully executed.
More reassuringly, we see that only 3% of respondents indicated that their firm is not prepared at all for the changes in regulation that are coming down the tracks. Overall, the responses to this question indicate that firms are struggling to prepare for the enforcement of regulatory reform, particularly in terms of their product data.
The next question in the survey was: “Do you think that new regulatory reporting requirements will change your organization’s attitude towards data management?”
Nearly one-quarter (23%) of all respondents indicated that recent regulatory changes will force their firm to totally change their processes for getting their product data into the market, while only 12% of the respondents indicated that their existing processes were fully supportable, automated and left a full statement of record to facilitate audit.
The greatest number of respondents (56%) indicated that their firms only needed to make some amendments to the existing processes in their firm, for the management of product data.
The response to this question aligns with previous responses – where it would appear that in most cases firms know what they need to do, but have not fully executed their plans.
Overall, the responses to the survey questions indicate that firms are struggling to prepare for the enforcement of regulatory reform, particularly in terms of their product data.
The final question in the survey was: “What are the biggest challenges in getting your product data to market – are they manual processes, timeliness, cost, accuracy or something else?”
The big shock here is that just over half (53%) of respondents indicated that the biggest obstacle to getting their product data to market is manual processes, with a similar number indicating that timeliness was an impediment. It is not surprising that 40% indicated cost was a problem – this most likely results from having issues with manual processes.
Of most concern though should be the more than one-third of respondents that indicated accuracy was a problem for them. This is worrying indeed when you consider the considerable focus that has been placed on data management in recent years and the vast amount of IT dollars that have been spent trying to address the problem.
Finally the 6% other – commented that ability to maintain a statement of record or auditable trail of ownership was their greatest challenge – which is interesting – the inference we derive here is that these firms have automated processes and reasonable levels of accuracy, but proving this and showing a demonstrable audit trail to auditors and regulators alike is a particular concern.
So that’s it on our survey results – I thought they were worth sharing with a wider audience and it might give you an insight into how people are preparing for upcoming regulation.
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!
I see a few interesting developments on the horizon with respect to data and the various financial regulation bodies.
I have kept my musings deliberately brief – if anyone is looking for more in depth commentary let me know and I will do a follow-up post on that topic…
For too long asset managers have been focusing on their data warehouse initiatives, often spending many years building them out, by which time the company in question has moved on and acquired other businesses with new data silos, warehouses, databases, data marts – you get the message – just as one data warehouse project finishes a new ‘enterprise data warehouse’ project is needed to bring the latest silos under the same umbrella. So the “information stores” which a business uses to deliver data to the external world are constantly changing – which leads to a lot of client and vendor related unhappiness.
At the same time the client reporting teams have been working away to build a client reporting infrastructure to deliver bespoke glossy reports, often without taking into account that a client report that is generated with poor quality data, is still a poor report, even if it is completely tailored to the client needs and is very flashy and glossy to the eye of the (be)holder. Client reporting vendors are left to carry the can to a large extent – the asset manager expects the client reporting vendor to clean the data up, while the client reporting vendor expects the asset manager to deliver clean data !
The marketing teams are busy to trying to automate the production of the product fact sheets – again the fact sheet automation vendor community place a strong reliance on good quality data being submitted to the process, while the asset managers to a large extent assume the data is good quality, why else would they allow it enter an automation process?
Micro-site content publication suffers from the same ills as the fact sheet automation process, except it is even more acute as the data is expected to be updated daily, and not monthly or quarterly.
The legal and compliance teams are at the same time busy working with their financial printers getting the simplified (or summary) prospectus, KID (if you’re in UCIT IV prep mode), annual/semi-annual reports and any other regulatory product documentation automated. Again though, the financial printers expect that they receive clean and timely data.
So what we have is an industry that unwittingly expects it’s vendors to work with poor quality data to generate high quality output – i.e. it is set up to fail miserably when it comes to getting good quality (= timely, consistent and accurate) data to the end investor, be that via a custom client report, a product fact sheet update, a web page view or a regulatory document.
If asset managers applied the same principles that network engineers apply to physical networks to protect the integrity of their inner network, by applying an “information firewall” that presented all client facing data to each of the vendors that required access to that data they would have; (a) a much happier vendor community and (b) superior content being presented to their end clients.
So an information firewall for investment product data should do some or all of the following; Read the rest of this entry »
As promised in the previous post, here is a synopsis of the second panel I sat on at TSAM recently.
The discussion centered on the changing shape of regulatory requirements and the implications for the buy-side – with specific emphasis on the following points;
- Which of the regulatory drivers are most painful? Read the rest of this entry »