The theme of Sibos 2016 in Geneva, “Transforming the Landscape”, is particularly pertinent to our marketplace. Faced with the unrelenting pace of regulatory and market change, constrained profitability and pressure to demonstrate greater transparency and governance to both internal and external stakeholders, financial institutions will have to apply transformational levels of change in order to meet these challenges.
Market and regulatory pressure – the path to profitability
A first-of-its-kind primary research study commissioned by Broadridge, entitled Restructuring for Profitability, surveyed nearly 150 buy-side and sell-side equity analysts covering the capital markets industry and has captured the collective wisdom about an industry undergoing broad transformation.
According to the study, a majority of analysts (61%) expect regulatory pressures on global securities firms to intensify between 2015-2020. They believe that the financial system is safer but are concerned about the risk of creeping regulations. The pressures of new regulation, operating prohibitions and more stringent regulatory interpretation assure continued disruption, and will make it hard for banks to deliver satisfactory returns on equity, according to the analysts.
Over half (55%) of analysts believe banks have not been sufficiently aggressive in re-engineering their business processes to improve efficiencies and margins in the preceding five years. A similar majority believe banks have not invested enough in new technology to improve profitability, which has taken a back seat due to regulatory demands.
The most promising areas identified for cost savings were in back-office processing and technology, where most firms have little ability to differentiate themselves. By rationalising and standardising non-differentiating back-office functions, banks can transform and create scale efficiencies which in turn frees up capital and resources to focus on core talents such as trading, risk management and end-client development.
Corporate governance and the investment lifecycle chain of trust
Governance has emerged as a signature risk of the post-financial crisis era. The recession brought in its wake costly bank failures, bailouts and debt write-offs, and revealed underlying weaknesses in investment practices. These events have severely eroded the trust and confidence of the ultimate asset owners – the investment managers’ end clients – and as such securities service providers and buy-side investors both have a core role in helping rebuild the trust that is so important to all stakeholders throughout the chain of investment.
Although financial returns will always be a vital gauge of success, profitability alone will not fully engender trust without the appropriate governance oversight and controls being in place. Trust will instead be rebuilt through initiatives such as proof of prudential investment and best execution, through responsible stewardship and adherence to ethical best-practices.
Intelligent analytics will play an increasingly pivotal role in rebuilding trust, empowering investment managers with the tools to demonstrate best-practices and supporting asset owners with a more transparent view of governance-related insights. Such tools can also give asset owners the ability to review and challenge decisions made on their behalf, and to compare outcomes and anomalies across their investment service providers from a truly independent perspective.
How well are share-issuing companies run and do their board practices cause exposure to risk? For diversified investment channels, is there differing guidance in terms of buy and sell decisions or vote recommendations? How comprehensively can best execution be analysed and proven? The scope for governance-related analytics in response to these and other questions is far-reaching and can transform core information into actionable insights by monitoring both the financial and nonfinancial governance of investment portfolios and the companies whose shares fill them.
Governance analytics is playing a fundamental role in helping build trust in the industry, and introduces a clear opportunity for service differentiation for all participants in the investment process.
Market pressures create opportunities – examples
1: Regulation driving transparent expense management
Margin compression and the drive for efficiency continue to be core challenges for banks, while at the same time increased scrutiny from regulators and investors has resulted in a need for greater transparency and accountability across supplier relationships.
Through automation, banks have an opportunity to increase the scrutiny of expenses invoiced to the firm by agent banks, exchanges and other financial infrastructure providers, reducing exposure to overpayments and improving overall business control for management and audit purposes. This in turn supports an accurate record on which to base client fees.
Regulators are now making expense tracking a compliance issue, as exemplified by MiFID II which requires a granular level of insight to be extracted from the investment process and recorded. A core component of this regulation is the separation of trading and research fees which need to be individually quantified – no easy task. With MiFID II scheduled to come into effect from January 2018, now is the time for both investors and service providers to begin their preparations.
2: Migration strategies – turning a market deadline into an opportunity to transform
No longer a distant horizon, the long-standing Accord confirmation matching service will be retired on 31st October 2017, leaving firms with little over a year to switch to an alternative solution if they haven’t already done so. The good news is that in assessing their options, firms will have an opportunity to review their strategy for matching and take advantage of the latest enhancements available to transform this core area. A potential target model should, at minimum, be founded on best-in-class service standards and support an enhanced operational control framework and client experience, while also enabling a timely and efficient response to market change, and supporting any growth strategies for new asset coverage or market reach.
By Tom Carey, president, Global Technology and Operations Solutions International, Broadridge and Demi Derem, general manager, Investor Communication Solutions International, Broadridge.
Meet the Broadridge team at Sibos, booth G78 and access the full report, Restructuring for Profitability, from the Broadridge team by emailing [email protected].