Fax-obsessed banks need TA-led solutions

The transfer agency (TA) sector is facing the challenges of coping with the increasing demand from fund managers and distributors. In Luxembourg, the centre point of the cross-border fund industry in Europe, the TA community is trying to develop solutions that can deal with the growth in cross-border fund transactions and the changing regulatory environment.

“What we see in Luxembourg is that the distribution of cross-border products is increasing and increasing,” says Mauro Dognini, head of product development for TA at BNP Paribas Securities Services. “Because volumes are growing, distribution is becoming more complex, with more problems regarding increased number of currencies, distributors and time-zone differences.” As a result, he says, they are witnessing the emergence of more intermediaries servicing distributors through nominee accounts. In the same vein, he points to a number of cases where asset managers are starting to promote their local funds – mainly French and UK funds – for cross-border distribution using the same network in place for offshore funds.

“On one side distribution is becoming more complex, but it’s also becoming more automated,” Mr Dognini explains, adding that industry players are investing vast sums of cash in developing and implementing more efficient solutions based on straight through processing (STP). “The industry is dramatically changing and improving.”

In the current cross-border environment, distributors want a unique point of access to the multiple jurisdictions they operate with. They want to consolidate sales, management information and the calculation of trailer fees. They also demand the reduction of distribution costs and operating risks.

For Mr Dognini, a good solution to these demands could be found in pan-European TA platforms, like the one his firm has in place. These platforms allow distributors to have one single contract for multiple jurisdictions, a single order and one payment and also one single view on trailer fees.

Service capacity

The same approach is shared by CACEIS, the combined investor services division of Crédit Agricole and Caisse d’Epargne, that has also developed a European TA platform.

“This means having the capacity to offer a service that covers all the funds of a fund manager all over Europe and to keep in our systems the consolidated position of the client so we can calculate trailer fees and offer better remuneration to the distribution network,” says Etienne Carmon, senior product manager at CACEIS. “What the fund manager wants is a one-stop-shop for all of his funds distributed all over Europe,” he adds. “This is the way to go now and we already have several clients that we serve this way.”

EU regulations – including the EU savings directive, Basel II, Ucits and further disclosure and reporting requirements – will also have a major impact on the way TAs work. “Even if we don’t see the impact of these directives now in terms of business, I think that in a few years this type of regulatory concerns will make a difference between some TAs and others,” says Mr Carmon. “I think that TAs with offices across Europe will be able to support both the local and European regulatory concerns.”

Regulatory constraints are not the only barriers for cross-border distributors and TAs. Local attitudes and culture, different languages and other particularities present significant obstacles to the establishment of standardised processes across the continent. “The other issue that you face is that you have to be linked to many clearing systems and proprietary systems,” Mr Carmon adds.

Even though standardisation seems the only way for the industry to become more efficient, some distributors, in particular private banks, still require a certain level of customisation.

“The most important thing [with private banks] is the secrecy of data and information and also the customisation you need to have for that type of clients in terms of reporting and such like,” Mr Carmon says. “This is probably something that doesn’t affect just private banks but it is very important for us to help standardise processes throughout different offices and at the same time to be able to offer some customisation to the end investor. And it is not easy to face these two issues.”

The way private banks use TAs varies according to the size and level of sophistication of the institution. Some have direct relationships with TAs and others tend to use different types of intermediaries. For Richard Willis, product manager for continental Europe at the Bank of New York, the demand for their services from distribution platforms such as Allfunds Bank, is now at its highest. Also, the use of platforms that automate fund transactions is now higher than ever before.

“It’s something that is very country-specific, but what we have seen in certain markets, the Swiss being one, is that they were very forward in asking us to move and connect to the likes of Fundsettle or Vestima +,” says Richard Willis, product manager for continental Europe at the Bank of New York in Luxembourg. This trend has indeed help firms such as Euroclear (with its Fundsettle platform) and Clearstream (with Vestima+) to see their transaction volumes soaring over the recent past. Clearstream’s investment fund services, for instance, has just reported a 54.5 percent rise in transactions processed in 2005, compared to the figures registered at the end of the previous year.

However, a significant proportion of the private banking sector still maintain direct relationships with multiple TAs. As the investment choice that this banks offer to their clients grows, managing this relationships is becoming increasingly difficult and, more importantly, extremely expensive. For small and medium-size distributors the fax machine is still their best friend and, as Mr Willis explains, all the players in the market are trying to encourage this fax-obsessed sector to move towards the adoptions of common standards and automation requirements promoted by the industry under the leadership of the European Fund and Asset Management Association (EFAMA).

“We are all talking about how we can introduce standardisation, not just in Europe and not just in Luxembourg. This is a cross-border issue driven by EFAMA and all the European associations,” Mr Willis says.

Although this industry-wide, fund processing initiatives are widely supported by market players, achieving a total STP integration in the market is still far away.

A recent survey by PricewaterhouseCoopers (PWC) found that while transaction facilities are improving, the integration of the various market-driven platforms have resulted in an increased level of operational complexity for some TAs and a decreased level of STP integration in TA operations. The study also highlights that as the European financial services industry has been moving towards more specialisation, TA services are not longer just about processing and reconciliation. TAs wanting to maintain their positions in the market place need to also offer a customer-focused strategy as well as being able to develop state-of-the-art technology. Client servicing and innovation in terms of fund administration will be also key for the future of their business.

International presence

As private banks are offering their clients more investment products from different jurisdictions, they demand TAs to be present in all the countries in which they are operating, or want to work with a firm that can efficiently operate across different jurisdictions from a central location.

“They can come to a centraliser, like ourselves, who can do it for them in different jurisdictions,” Mr Willis adds. “The problem then comes back to the individuality of different jurisdictions. There is a big difference between investing in a Luxembourg Sicav and a French domestic fund.”

“We have an aggregation system that allows us to take the orders and then we allocate them to whichever TA they’ve got to go to,” Mr Willis says. “A partner – an insurance company or bank – can come to a central point and we can work with all these multiple jurisdictions. The problem comes when you get into that jurisdiction, and that’s where the market is still behind where it needs to be.”

The large investment requirements and increased complexity of TA operations might result in greater concentration among market players although, according to Mr Willis, this can take longer than some might think.

“If you compare the UK market and the Luxembourg cross-border market, you see that in the UK you have probably six providers controlling a large proportion of the market. In Luxembourg the market is very scattered because you still have a lot of the asset managers wanting to retain certain amount of their administration in-house,” Mr Willis says. “We would expect that with the introduction of recent regulations – like the European Savings Directive – there might be a drive to outsource that. I think there will be a continued consolidation of service providers in Luxembourg but probably not at the pace some have been expecting.”