Contribution - Alfi

Post-crisis fund regulation pushes data to centre-stage

Noel Fessey, CEO de l’EFA. (Photo: Jan Hanrion/Maison Moderne)

Noel Fessey, CEO de l’EFA. (Photo: Jan Hanrion/Maison Moderne)

A decade after the financial crisis of 2008-09, the fund industry, along with the rest of the financial services sector, is adapting to the new regulatory landscape that has evolved in response to the lessons learnt from the turbulence that rocked countries and economies around the world a decade ago.

While the investment management and fund sectors played only a peripheral role in the unfolding of the crisis, they have found themselves subject to new rules, especially regarding transparency toward regulators and clients, designed to improve understanding of the sector’s impact on the overall financial system and to address information imbalances between providers and their customers.

Meanwhile, global initiatives and European legislation aimed at curbing financial crime, especially money laundering and the financing of terrorism, are also leading to new requirements on fund managers, along with other financial institutions. They are now responsible for monitoring and where necessary reporting the origin and destination of funds passing through the financial system, including stricter new rules on the disclosure of ultimate beneficial ownership of assets.

The importance of information

Although UCITS funds are already required to provide a key investor information document to potential investors, the future introduction of the PRIIPs requirement represents a fresh demand on the industry to collate, compile and publish information in the format required by EU and national legislation.

The substantial increase in these new requirements reflects an important lesson of the crisis – that the financial meltdown was exacerbated by inadequate awareness and understanding of the often complex nature of financial products and strategies, not only on the part of retail customers, but in some cases members of the financial services industry.

Remedying that information shortfall is now the direct responsibility of the investment management industry, but it is one they struggle to meet without assistance from service providers whose duties already require access to a vast range of data generated by the sector on a daily basis.

Complying with the new rules requires the tracking of information throughout the investment value chain, including on the decision-­ making process, individual securities, pricing, costs, the fund product itself and the investors.

This involves the difficult task of extracting and collating data from a range of often unconnected and sometimes incompatible IT systems. It has also helped to spur the emergence of providers whose business is connecting parts of the value chain, at a cost that has become an extra burden for an already stretched asset management industry.

The cost factor

The cost issue is critical for the sector, whose revenues were severely impacted by the effects of the crisis on asset prices and investment demand, even though these have subsequently recovered. At the same time, companies have been obliged to make substantial investments in IT systems and human resources in order to meet the heightened regulatory requirements. The sharply increased penalties for breaches and lapses worldwide mean this is not an aspect they can ignore.

Preparing for the next wave

A few years ago, fund providers used to console themselves that the wave of new regulation developed in response to the crisis would soon be complete, and that the pace of rule-making would slacken. Today, this seems less likely as rule-makers in the EU and beyond focus on areas that are taking on a higher profile, such as protection of personal data.

The importance of the role of fund service providers in gathering and assembling the data required for regulatory compliance and customer transparency is poised to grow further in the future, beyond the upcoming impact of measures such as PRIIPs. But the message for fund firms is clear: they cannot afford to take their eye off the ball.

More news on the fund industry in  Paperjam’s Alfi  supplement.