Financial institutions fail to reap benefits of fee and commission management

London - 15 March 2010

A high percentage of financial institutions are neglecting to consider the area of brokerage fee and commission management as part of their cost control and operational risk strategies, despite the pressures of the financial downturn.

According to a report from Datamonitor*, up to 48% of banks have no idea of their current commission levels, perform only simple checks or rely on a general feeling when consulting current commission levels. This situation has been allowed to develop for a number of reasons, such as the complexity of agent relationships and difficulties in the maintenance of fee schedules. However, a similar percentage of financial services firms surveyed in the report noted that the amounts paid for commission and fee charges are either critical or very important in overall P&L terms.

“In the past, many financial institutions have ignored automation in the area of commission and agent fee management, despite the focus on straight through processing in other areas,” comments Richard Hill, CEO of operational risk management specialist, City Networks. “However, there are huge gains to be made. At a global level, for example, through centralising the processing of invoices to negotiate better terms, and at the local level, in being able to allocate trading costs back to individual traders by trade type. In this
way, the real cost of trading becomes much more visible.”

It does appear that, despite neglect in this area to date, financial institutions including banks, brokerages and securities houses are beginning to take this matter seriously. Issues such as competitive advantage and cost control are leading institutions to consider options such as centralising expense management and consolidating agent relationships.

Taking a centralised approach to management of complex fee and commission data leads to a greater transparency in the cost of trading. This in turn enables financial institutions to take a more proactive control over third party contract reviews to negotiate improved fee structures and service level agreements, as well as ensuring best use of funds.

“With a centralised approach in place, financial institutions have a much clearer view of their broker and agent relationships. Automation of these processes also increases efficiency and reduces risk from manual processing. With this comes greater transparency of trading costs and so it becomes much easier to focus management scrutiny on achieving performance improvements and better cash management” says Hill. “It is the natural next step in the STP process.”

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