Fundsquare’s Head of Product Management Paolo Brignardello explains why its distributed ledger platform could be the Ford Model T of the fund industry.

Paolo Brignardello

Head, Product Management & Marketing, Fundsquare

It’s not easy adapting to change, and the fund industry is finding it a particular struggle.

Pressure on product costs and transparency are increasing, while new ways of doing business demand new operating models. The advent of several compliance directives in quick succession, such as the second Markets in Financial Instruments Directive (MiFID II), the Regulation for Packaged Retail and Insurance-based Investment Products, and UCITS V, are also heaping a greater regulatory burden on asset managers’ shoulders. At the same time, rising intermediation in distributing funds in the last decade has squeezed margins.

What’s more, they’re having to adapt to changing client behaviour, with a growing number of millennials placing greater emphasis on simplicity and convenience of services, as well as security.

Paolo Brignardello, head of product management and marketing at Fundsquare, says the sector has little choice but to adapt. The question is, how?

“The industry is really facing pressure on cost and fee transparency. So there are big pressures that require a transformation,” he says. “But for many reasons, above all legacy systems and organisation, it’s not easy to embrace.“

A "concrete" blockchain

For Fundsquare, an initiative by the Luxembourg Stock Exchange to improve market infrastructure, the answer lay in using a distributed ledger that directly connected investors and fund managers.

Described by Fundsquare’s MD Olivier Portenseigne as the ‘Ford Model T’ of the fund industry because of its potential for radical disruption, FundsDLT launched late last year as a decentralised fund order processing engine, based on distributed ledger, digital tokens and smart contracts.

“Many blockchain projects are still experimental. Our initiative goes beyond that. We have started to create something concrete that will be completely new,” says Brignardello.

The platform, which is a collaboration with InTech (a subsidiary of the POST Group) and KPMG Luxembourg, works across the value chain, allowing asset managers to sell funds direct to the investor, and speeding up the messaging between the investor, the asset manager, the custodian bank and the transfer agent, thus reducing execution times from days to a matter of hours.

The operating model sees an investor going through a smartphone application to access fund information and performing know your customer (KYC) compliance checks, then processing an order by provisioning cash through a digitalised token. On the other side, transfer agents will inspect the KYC elements that have been collected and accept the order, while an asset manager can follow up inflows and outflows in the register in real time. Once the net asset value is published, the entire settlement process is executed instantaneously.

Deep digitalisation

FundsDLT operates through an application programming interface (API) framework that delivers an open standard, covering account creation, transaction processing, KYC, payments and entitlements. A key feature of the platform is the ease with which compliance checks around anti-money laundering (AML) and KYC can be undertaken. That’s achieved by standardising and mutualising the process so that customers no longer need to be verified separately by each bank. The platform will also facilitate fund data look through and MiFID verification.

As an industry we need to go much deeper into the digital transformation, otherwise we’ll be hit hard like the music, video and press industries that have all seen digitalisation. New generations will want to have easier access to financial products. That’s why we need to reframe the architecture and the ways products flow to the selling point.

Paolo Brignardello 

Head, Product Management & Marketing, Fundsquare

Crucially, here he’s talking about personal pension management, which is likely to bring a much wider and more inexperienced mass affluent audience of investors into the fund market. For years, fund managers have found it hard to reach out to investors, while they in turn are frustrated by intermediaries. The upshot has been restricted choice and an industry known as being opaque. Brignardello says greater transparency is being driven by a combination of market forces and regulation.

“There are more and more competitors in the fund industry that are competing by showing their fee levels,” he says. “They are pushing to gain market share.” He adds that, while cross-border distribution is a trend that already exists, ‘more capital market union efforts from the European Commission will trigger the possibility of even more efficient cross-border distribution’.

Rather than squeeze out actors in the fund distribution supply chain, Brignardello believes the Fundsquare platform will benefit everyone who can plug into its new ecosystem, concluding: “It’s still in the early stages, but the industry should follow the model.”

Fintech Finance, Summer 2017

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