Why the global Transfer Agency (TA) model makes sense
As entities entrusted with the provision of investor servicing and register maintenance, transfer agents (TAs) have long been a vital component in the fund industry. Similar to other back office activities such as fund administration and custody, some are speculating about the actual durability and relevance of TA1 in what is becoming an increasingly digitalised funds’ ecosystem. However, larger asset managers with sizeable international footprints seem to be looking to leverage the services of global TA providers with their networks of local agents and expertise. The “Global TA” model provides investors and managers with a streamlined, consistent service and consolidated reporting across different markets. Most importantly, servicing can be performed in the domicile of the shareholder as opposed to that of the actual fund.
While technology will undoubtedly be very influential in shaping TAs’ long-term development, the elimination of the Transfer Agent entirely as a middleman between the fund and the shareholders is unlikely and certainly will not be a near term development. Therefore, role of the TA is expected to become even more significant in the context of these rapidly changing market dynamics.
Macro conditions accelerate the need for TA
Before COVID-19, the asset management industry was facing some significant headwinds. The asset management industry has faced some significant challenges lately. Market conditions have hindered returns leading to widespread investor outflows. According to reports, USD30 billion was withdrawn from active managers in 2019, levels unseen since 2016.2 These net outflows corresponded with growing regulatory scrutiny into active managers’ costs and charges, contributing to yet further fee compression. Active managers are also losing assets to low cost passive funds and this trend shows no sign of easing. In the US, index trackers now account for 35.5 per cent of assets3 while Moody’s is predicting that passives could be running more money than active managers by 2021.4
Not only is this margin pressure and increasing competition resulting in growing consolidation at active asset managers, it is prompting more firms to outsource some of their ancillary activities like TA and middle office to third party providers. Heightened costs are also forcing asset managers to rationalise the number of supplier relationships they maintain in order to streamline their oversight processes. However, it is not just the asset managers that are embracing outsourcing. TA providers are also beginning to seek external support for some non-core processes such as shareholder documentation production; FATCA or CRS (Common Reporting Standard) tax services and even KYC (know your customer) offerings. How COVID-19 will affect this trend, remains to be seen, however, the industry will face an unprecedented amount of challenges in the coming months, where we expect an acceleration in digitalisation in the securities services industry.
The influence of technology in TA
Digitalisation is reshaping the nature of TA. Digitised processes are seen as less costly and lower risk compared to traditional manual or semi-manual processes but to be really effective they require a digital input or instruction. Fortunately, the nature of the underlying investors is changing as well. Shareholders have become increasingly tech-savvy – most notably millennials who prefer to conduct their financial transactions (e.g. personal banking or investing) online. This is enabling service providers, including TAs, to shift away from labour intensive manual processing towards more digital-led solutions. Progress is being made with more TAs now automating some of their core activities, often by leveraging technologies such as distributed ledger technology (DLT); robotic process automation; machine learning and artificial intelligence.
To date, most TA DLT initiatives have focused overwhelmingly on trying to deliver superior levels of automation in the subscription and redemption process. While this is obviously a noble endeavour, industry efforts to improve automation of subscriptions and redemptions have been underway for many years. While DLT can provide clients with enhanced security through advanced cryptographic encryptions along with better integration via smart contracts, its real value lies with the provision of a single version of the truth to all counterparties in the transaction lifecycle. Through this, DLT can eliminate duplication and dual recordkeeping of shareholder positions across multiple counterparties in the distribution chain – including at the TA level. This potentially generates cost synergies.
However, this requires all these counterparties to adopt their legacy platform to participate in the DLT platform. This is a lot easier said than done as each of these players (asset manager, distributor and transfer agent) are currently working with multiple counterparts each having their own technology solution. It will be very difficult to convince a distributor working with several asset managers to adopt a DLT solution which allows one TA or one asset manager to avoid duplication of records for their funds registrar. So unless the asset manager has a propriety distribution network that can be brought into a DLT solution of their own design, it is difficult to reap all the benefits that DLT can offer in the distribution model.
Digitised processes are seen as less costly and lower risk compared to traditional manual or semi-manual processes
Regulatory scrutiny of Transfer Agency activities
KYC and AML (anti-money laundering) have been the subject of relentless regulatory opprobrium, but the industry’s approach to it continues to be chronically inefficient. This is primarily because different markets have their own unique KYC/AML regulations, which are often highly bespoke. Without some sort of global standardisation, AML/KYC checks on clients during the fund subscription process will likely only get more complex and intrusive. This could ultimately add to TA costs and negatively impact the end user experience. Admittedly, there are a number of industry initiatives trying to solve this problem either by formalising the exchange of KYC data or by creating a centralised KYC utility. However, such schemes are often only effective locally which nullifies their wider market impact.
Other regulations are having a transformational impact on the operating models at TAs too. The EU’s GDPR (General Data Protection Regulation) imposes stringent requirements on data controllers and data processors, obliging organisations to ensure that customer or proprietary information is stored appropriately and not misused. This comes following a series of high-profile cyber-attacks and data leakages in recent years. As TAs maintain fund shareholder registers, they and their own third party providers hold very sensitive client data (e.g. addresses, information about personal wealth, sources of income)5. Therefore, it is critical for TAs to have robust protections and processes in place to safeguard customer and investor information.
The Markets in Financial Instruments Directive II (MiFID II) has also had an impact on TAs. MiFID II is designed to bring about greater transparency in the funds’ market by, amongst other things, requiring the industry to provide investors with more detailed information about the fees they are paying and the products they buy. The product governance provisions insist asset managers and distributors gather information on end investors to check that the funds being sold to clients are suitable. As TAs possess a lot of this client data, they will have a pivotal part to play in ensuring that appropriate information is shared with distributors and managers.
A Global TA Model
As markets become increasingly complicated and cross-border distribution volumes continue to expand, the advantages of partnering with a provider that offers a global, consistent suite of services while handling the underlying complexity of different regulations and market practices becomes even more compelling. A Global TA model is able to offer both asset managers and shareholders a client experience which would be impossible to replicate across individual service providers each focused on their specific fund domicile. The recent COVID 19 crisis has shown, that this model is also resilient against multi-country lockdowns, where providers with multiple sites are able to uphold BAU for asset managers without risking disruption to core services.
COVID-19 has disrupted the financial services industry significantly and demonstrated the need for robust but flexible operating models. Technology is not only a key enabler in providing a cost efficient solution to the ever changing challenges, but it actively shapes the future in a post-COVID-19 world as well. The TA of today will likely be very different from the TA of tomorrow...
About HSBC Securities Services’ Transfer Agency service
HSBC is developing a core Transfer Agency offering that streamlines each operational process (KYC, client on-boarding, investor servicing, transaction processing, reporting, fee calculation,...) to be global by nature, i.e. relatively independent of the specifics of any given fund domicile. We are constantly scanning the market to identify potential opportunities and initiatives that we feel will enrich our global solutions and client service proposition. If – or indeed when - DLT or KYC initiatives become more widely accepted and proven, then we will look to integrate them into our core product offering.
Steven Caluwaerts, Director GDTA Product, HSBC Securities Services
This article is the first in a series looking at some of the opportunities and challenges facing the TA model in an increasingly digital marketplace.
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2Financial Times (July 7, 2019) Investors flee active funds at highest rate in 3 years
3Financial Times (July 7, 2019) Investors flee active funds at highest rate in 3 years
4Moody’s (March 14, 2019) Moody’s: Adoption of passive investing on track to overtake active in two years
5Deloitte (September 2017) GDPR for funds