According to figures from the UK Treasury, the UK funds industry could save up to £290 million per year by embracing automated fund unit settlement. Here, Jason Waight, head of UK product management at Euroclear, discusses why fund distributors must consign outmoded manual back-office processes to history.

Purpose-built fund processing

Wealth managers who place orders to subscribe to or redeem fund units on behalf of their clients demand expedient and dependable services from firms involved in transferring fund units and cash. The risky manual processing currently employed today can be consigned to history, with the recent introduction of fully automated order-routing, settlement and safekeeping services.

Available since the autumn of 2009, EMXCo and Euroclear UK & Ireland provide the UK investment fund industry with a “one-stop-shop” where fund unit movements and related cash credits and debits are done electronically. This consolidated source of transaction processing and information has long been sought by the market to eliminate time-consuming manual reconciliation procedures, which is particularly significant in satisfying MiFID and Financial Services Authority reporting requirements. Furthermore, we’re pleased to say that it is a market-driven solution that is the result of months of consultation among the 26 members of the UK Fund Liaison Group and technical working groups, representing all segments of the fund industry. This support and constructive dialogue has been highly appreciated and is indeed vital to a successful transition to automation.

Delivering the benefits

Fund unit movements are processed and balances reconciled daily with the fund register. As such, those wealth managers overseeing their retail and institutional clients’ portfolios will be able to provide customised reporting when, and just as often as, the client requires.

Furthermore, independent investment advisors will be better placed to encourage retail clients to invest in UK mutual funds, as these orders are now as easy to process as transactions in other asset classes. Fund transaction settlement is now conducted within four business days, as compared with up to ten days where manual processing was involved. Sizeable back-office efficiency gains are to be had by settling UK fund transactions where market participants already settle their UK equity and bond transactions, i.e. with Euroclear UK & Ireland.

Euroclear UK & Ireland caters for a large retail client base, providing a range of post-trade services for approximately £460 billion ($704 billion) of assets. Retail and institutional clients are both highly familiar with the safety and benefits of automation, the low-cost processing environment, and reliability of settling transactions in the UK’s central securities depository. Settling UK fund transactions is a natural extension of their Euroclear relationship.

The Investment Management Association recognised this in setting down its principles for fund processing, recommending that fund providers make or collect settlement electronically, or via Euroclear UK & Ireland, on a predetermined date for the transaction.

Astounding automation

As the tough economic situation continues into 2010, asset managers and the clients that they support will need to find new ways to do more for less. According to HM Treasury, the UK funds industry could save £70-290 million per year by embracing processing automation in place of paper-based fund unit settlement.

A typical fund distributor settling around 10,000 transactions a month may today expect to pay up to £50,000 per month for processing these settlements and subsequent reconciliations. Under the automated service, the same distributor doing the same levels of business can expect a monthly bill for all balance reconciliation, transaction processing and communication services of less than £8,000. Clients processing lower levels of transactions can also expect to make significant savings.

Pioneering efforts to fully automate the UK fund industry – the last asset class in the UK to undergo such a transformation – is a positive move for UK investors. Increasing STP rates and transparency along the processing chain is critical in boosting client satisfaction, while reducing risks and costs. In early 2010, Euroclear UK & Ireland and EMXCo will take additional steps to automate flows for cross-border transactions in UK funds and to ease access to foreign funds for UK investors. Timelier settlement, as well as substantial savings triggered by automation, will be available through a single access point.

Given our increasingly competitive investment environment, distributors compete keenly for third-party mandates and investment fund managers work even harder for the assets their clients entrust to them. They should not be concerning themselves with manual back-office processing.