What would an asset management know-your-customer utility look like? Paolo Brignardello of Fundsquare considers the view.
Investors are demanding lower fees, and are putting asset managers are under greater pressure to deliver value for money. However, this is just when regulations are driving up costs. Bold reform of fund industry practice is needed, and one promising option is a fund-industry focused know-your-customer (KYC) centralised utility. What could this look like?
Mutualised utilities have been helping the finance industry cut costs and increase accuracy for decades. Performing key tasks centrally through a trusted provider enables players to avoid having to duplicate tasks in-house. As well as reducing cost, there is an improvement to quality and accuracy as data and documents are shared, checked and screened centrally. A hub and spoke system replaces a spaghetti plate of potentially confusing bilateral relationships.
KYC is particularly well suited to being streamlined through a utility. More than sixty documents and data points can be required by asset managers related to KYC for each investor. Considering that nowadays, following an open fund distribution model, investors tend to subscribe to multiple funds, KYC documents could be collected, verified, updated and processed centrally once and for all. Investors would only need to upload data once, and then could grant access to this information on a case-by-case basis. Several KYC utilities have emerged across the financial sector, but none fulfil their needs for the fund industry.
Ultimate KYC responsibility cannot be delegated by law, and must stay with the management company, even if the dominant model sees a delegation of operational activities to the transfer agent. However, through a contractual relationship several tasks could potentially be centralized. Processes that could be accommodated include customer identification, initial risk assessment, compliance information, onsite and other forms of due diligence like the know-your-distributor checks, tax information verification, document collection and review, risk scoring, reputation risk management, FATCA/CRS compliance verification, AML/CFT country risk assessment, and reporting to regulators and crime agencies.
This all needs to be monitored and maintained for completeness and validity on an on-going basis, which is the most onerous aspect. Watch-lists and country risk assessments must be kept updated, including media monitoring. Dashboards could be generated to keep interested parties informed and up to date, with alerts issued when necessary.
Out of scope of a utility (and thus would remain the responsibility of the fund and the Transfer Agent) have to be client acceptance, account opening, transaction monitoring and screening, reporting of suspicious transactions, and a transaction archive. The distributor would remain in charge of providing application documents, with the transfer agent responsible for the share register and AML transaction monitoring.
The core of this effort would be organised through a central document repository/exchange which would collect, disseminate and archive documents. Additionally, a risk-based approach could be used for certain tasks.
During the migration phase, the management company would ask all existing fund investors to upload a full list of the required KYC documents directly to the platform. When up and running, new clients would be on-boarded directly to the utility. Monitoring of KYC data and documents would be on-going fashion, either using the repository/exchange or via a risk-based approach.
Distributors and asset managers would see greater cost savings and business benefits for transaction processing with streamlined order routing and compliance tasks such as regulatory reporting and passporting. The establishment of distribution agreements and fund set-up requirements would also be eased. Business value would be generated from performance analytics and market research.
There are major potential gains from such an approach. For example, nearly €1bn could be saved each year through greater mutualisation in the Luxembourg fund industry, Europe’s leading cross-border domicile. Analysis by Deloitte has shown that KYC and due diligence procedures offer the biggest potential savings, with cash and document management, order processing, and corporate actions also ripe for reform. Another example is how a Mifid II utility could streamline procedures and reporting. It would share key information including product investment strategies, the “suitability” of investors for complex funds, costs and fees embedded in each product, and changes in asset ownership.
Moves are underway to create the KYC utility the asset management industry needs. Fundsquare is working with industry players to understand requirements and gauge options. Given Luxembourg’s unique role as a cross border service provider there is potential to make an important breakthrough. There is a precedent, as the financial industry came together to found CCLux (now Fundsquare) in Luxembourg in the early 1990s to create a hub-and-spoke data sharing utility.
If all stakeholders can be equally entrepreneurial once again, the benefits to customers and the wider economy would be significant. The prize for building these data hubs is a more resilient, efficiently regulated financial sector offering better quality services at lower cost. The industry is moving to make this happen, but further decisive action will be required by asset managers, regulators and legislators.
Asset Servicing Times, Sibos issue