By Carl Thorsen, ClauseMatch
Until recently, there wasn’t a great deal of interest in regulatory technology (RegTech) from the asset management industry.
It is no news, that in the past, much of the regulation aimed at buy-side entities was less complex than the regulation aimed at the sell-side, and as a result, there wasn’t an urgent need for asset managers to adopt RegTech. Often, the costs of implementing new technology simply outweighed the benefits, particular for smaller buy-side firms with limited resources.
However, regulators have set their sights on the buy-side as well as the sell-side over the last few years, and consequently, regulatory requirements for asset managers have increased sharply. This year alone, we have seen the introduction of the Markets in Financial Instruments Directive II (MiFID II), the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation, and of course, the General Data Protection Regulation (GDPR), which when combined with other new regulations such as the Market Abuse Regulation (MAR), the Senior Managers and Certification Regime (SM&CR) and the Alternative Investment Fund Managers Directive (AIFMD), add significant regulatory and compliance pressure for asset managers and wealth managers.
“It’s no surprise, that buy-side organisations are now increasingly turning to RegTech in an effort to increase efficiency, lower costs and meet enhanced compliance obligations. Asset managers are recognising the value of automation and are embracing the technology in order to ease the regulatory burden.” – Carl Thorsen, VP Business development at ClauseMatch, commented.
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Complex regulatory requirements
MiFID II, which aims to make European financial markets more transparent, has been a game-changer for the asset management industry. Whereas many buy-side organisations fell outside the framework of MiFID I, MiFID II has been extended to cover all UCITS (undertakings for the collective investment in transferable securities) management companies and AIFMs (alternative investment fund managers), meaning that regulatory requirements for many investment management companies have suddenly become significantly more onerous. The demands are substantial. For example, not only has MiFID II increased the scope of reportable transactions to include financial instruments trading, or admitted to trading, on all EU trading venues, but it also includes far more demanding ‘best-execution’ disclosure requirements as well as more burdensome transaction recording requirements.
Hedge funds and private equity firms are also feeling the pressure. Only a decade ago, there were very few formal reporting requirements for alternative investment managers. However, the regulatory landscape changed with the introduction of AIFMD as this framework now requires alternative investment managers to report an extensive amount of information to regulators on a regular basis. With AIFMD having over 300 separate data fields to populate, alternative investment managers are finding that they now need to dedicate considerable resources to compliance.
Automation and efficiency
At the core of the increase in interest in regulatory technology from the asset management industry is the desire for efficiency. Indeed, in a recent asset management survey by consultancy firm EY, 85% of asset managers surveyed stated that increased efficiency was a key reason to adopt regulatory technology. “From managers’ perspectives, there is real excitement around the opportunity to do more with less,” says Ben Lucas, a partner in EY’s Wealth & Asset Management practice.
Asset managers have realised that by leveraging the power of technology to automate and streamline processes they can save time, money and resources. Ultimately, this means they can focus more on their main goal, which is managing clients’ money.
Yet it’s not just automation and efficiency that is driving the shift towards the use of regulatory technology, as many innovative RegTech firms are now able to offer their clients so much more. For example, EY’s study found that asset management firms that are embracing regulatory technology are likely to derive significant benefits “far beyond core compliance activities” and that asset managers with more advanced regulatory technology programmes were more likely to highlight transformational opportunities. From predictive analytics to the strengthening of the oversight capabilities of a business, the opportunities available from the use of RegTech are vast.
However, while more and more asset managers are embracing regulatory technology, there’s no doubt that challenges remain. For instance, 92% of respondents in EY’s survey voiced concerns over the difficulty of integrating RegTech into legacy operating models. Another key concern was data privacy, with 69% of asset managers surveyed identified security as an issue, as they think. Furthermore, many new RegTech firms have entered the market in recent years, so the challenge for asset managers is to identify the firms that can add the most value.
Yet with regulatory demands on the asset management industry likely to continue increasing in the years ahead, RegTech looks set to play an important role going forward. Those that embrace the technology are likely to derive considerable benefits, not only within the compliance department, but firm wide.
Associations bridging the gap between asset management and new technology
RegTech firms start witnessing the growing interest of the buy side in innovative regulatory technology solutions. And, so do the associations. As part of the drive to increase market engagement and awareness, the Investment Association recently created an absolutely new category of membership to accommodate the specific needs of FinTechs operating within asset management and the wider buyside market. ClauseMatch, a London-based RegTech, recently became the very first company to join the Investment Association’s (IA) newly launched FinTech membership category. The new category is designed to boost engagement between FinTech firms and the asset management industry and facilitate the adoption of cutting-edge technologies by buy-side firms. FinTech firms are also being invited to apply to participate in the IA’s FinTech accelerator programme Velocity by 28 September.