Global Regulatory Juggernaut Continues To Drive Outsourcing Trend - Cerulli

Tom Burroughes

20 February 2014

A widely contrasting array of global financial regulations are nevertheless encouraging firms such as fund houses to outsource chores, such as documentation, as the volume of red tape forces change, according to , the consultants.

Regulation is pushing more groups to outsource key functions, but the direction is not all one way. Others are outsourcing operations to fund managers too. Discretionary portfolio managers will benefit as commission-based models crumble, according to the latest edition of The Cerulli Edge-Europe Edition.

"What is remarkable about our regulation survey findings is the consistency of what is being outsourced most for different bits of legislation," Angelos Gousios, a Cerulli senior analyst, said. He talked about developments such as the MiFID directive on markets in the European Union, or the EU’s Alternative Investment Fund Managers Directive, the EU’s Solvency II capital rules on insurers, and the US FATCA Act enforcing rules on expat US citizens.

"The AIFMD is very different to EMIR, FATCA (not even a European set of rules), or MiFID II, but updating technology and document production (those key information documents) are the functions most likely to be outsourced. Solvency II produces slightly different results, with the sheer volume of data needed to be sent to insurers skewing results,” Gousios said.

Cerulli argued that “fund managers are there to manage funds, not run servers or decide whether to upgrade to Windows 8. Likewise, producing monthly fact sheets in multiple languages in a timely fashion is something that can and should be farmed out to a KIID (Key Investor Information Document) factory that can do it at a fraction of the cost of employing a European Commission-sized writing team in-house”.

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The organisation also referred to the UK’s Retail Distribution Review programme of reforms that ban trail commission payments from fund firms to financial advisors, saying this reform may spawn imitators overseas.

"Even if MiFID II does not result in a commission ban, if the French get their way, other countries may still follow the United Kingdom with their own domestic rules," said Barbara Wall, Europe research director at Cerulli. "If so, asset managers spy a pan-European opportunity. Advisors will not want to select funds for clients, so they will outsource. In the United Kingdom discretionary managers are thriving by offering a host of graded portfolios for the job,” she said.

Among other parts of the report, Cerulli said that as far as initial set-up costs, Solvency II looks “eye-wateringly” expensive. It said that insurers will need to know much more about the assets they are invested in, requiring a herculean push to set up data systems. Any fund manager who services these institutions must adhere. “No longer can a fund-of-funds manager just send a list of top 10 underlying funds,” Cerulli said.

It noted that the European Union’s UCITS products are gaining traction in Latin America due to regulation and the growing appeal of the brand among local managers. “Chile represents the largest opportunity in the region as it allows the direct sale of UCITS, and local pension funds make good use of that. Chilean private pension funds had more than $60 billion invested in cross-border vehicles, including exchange-traded funds (ETFs), at the beginning of 2013,” it said, adding that it predicts that total exposure to cross-border vehicles and ETFs to rise to more than $150 billion by the end of 2017.

And as far as readers of this publication is concerned, Cerulli’s statement about its report concluded: “While onshore private banking will be a growing channel, offshore booking centres will continue to be an attractive place to do business. Those seeking to chase hidden assets in other offshore booking centres such as Singapore are unlikely to turn up trumps.”