For all its trillions of assets under management, the fund industry is still relatively young and immature. It remains highly fragmented and suffers from hyper-regulation. Over time, this has led to layers of inefficiency. Whilst it might be a growing industry, it is yet to drive further efficiencies for investors: much to their disadvantage.
Every time industry practitioners do something wrong – innocently or otherwise – the only way to regain control is to introduce regulation. But it needn’t be that way. Fundamentally, if people had done things the right way to begin with, and there was a genuine desire and mindset to treat investors in a transparent fashion, there wouldn’t be any need for regulation. It would become self-compliant.
How can we go about a smarter way of achieving this?
For sure, it’s not going to be through technology. It hinges on behaviour. It’s about culture and the determination not only to do the right thing, but to do things right.
The fund industry needs to go through this cultural change.
Various players have to be determined to want to change things. Only then, at that point, does technology become the enabler. It is the job of asset managers, insurers, banks to help investors achieve their life goals. However, one cannot change anything in the industry unless those key players make it a better place for investors. It cannot be achieved by technology alone.
The fund industry is awash with regulatory rules for fund managers, for fund products, for distributors and so on. There is little, if any, consistency in these rules. They are not 100% identical from one country to the next and this is what creates complexity and inefficiency.
I believe the biggest benefit to investors would be standardisation: one global standard for all investment products, just as you have one global standard for iPhones, for data centres, for aircraft etc.
If one looks at the telecommunications industry, until recently it was highly regulated and, in many European countries, nationally monopolistic where huge margins were realised. That soon changed when digital disrupters like Skype, and countless others, came along and gave customers an alternative solution.
Between 2012 and 2017, the telecoms industry has lost an estimated EUR400 billion in revenue due to this disruptive effect, and it has been a clear benefit to the customer.
I believe we will see similar effects taking place over time in the fund industry.
Change should be driven bottom-up, based on what investors need, not top-down by regulations being introduced in response to political pressure.
My feeling is that the industry rules on which all this regulation is based can become consistent, if there is a willingness to change from within.
One industry survey on Priips found that it could cost the industry EUR2.5 billion. I can’t see why it should cost any more than EUR25 million. Still today, every time there’s a new regulation, asset managers bring in external consultants and they take a silo-based approach to the situation.
The ability to offer an integrated platform solution would make it easy for clients to onboard all of their fund data in order to generate all of the necessary reports. Then, for any new report or regulatory rule, all the asset manager would need to do is hit a confirmation button on the screen.
Using a rule-based fund registration tool, one would simply click on a share class and drag and drop it into the country they wish to distribute. Two things would then happen. Either an alert would automatically be generated if the fund were not suitable for distribution. Or it would go through the registration process seamlessly, without the fund manager having to wait on external parties to complete the process.
We have to get rid of the duplication problem. Why should a fund distributor send 10 different reports to 10 different regulators, using 10 different interfaces? It’s ridiculous.
Using our platform, asset managers can manage their data feeds and are best positioned to move towards standardisation, i.e. efficiency. The amount of aggregated data will dramatically drop, to the point where any new regulation will not require any additional input, or cost, from the asset manager.
That is the ultimate vision for the future.
By Bob Kneip