Superannuation funds and asset managers will face a number of challenges in 2021 as the financial services industry continues its transformation, according to BNP Paribas Securities Services Head of Relationship Management, Belinda Nicholas.
The pace of change in the superannuation fund and asset management space shows no sign of abating this year, with the need to invest in more sophisticated data management services, growth in outsourcing and a greater focus on ESG disclosure likely to be key themes for 2021.
An increasing number of asset owners and managers are turning to, and partnering with their custodians for their help to adapt to these challenges. With services that cover all securities-related activities, from full middle and back-office outsourcing to global execution-to-settlement solutions, custody is a complex but essential part of the financial services market.
As the industry continues to transform, there are several ways in which custodians are facilitating this progress.
Data Management Services at the forefront
Financial services businesses today are faced with the challenge of managing and harmonising data from multiple sources. As a result, the demand for data management services among our clients is strong and increasing fast.
Data management services aim to normalise and integrate multi-asset class data from internal and external sources, allowing managers of assets to make more informed investment decisions.
While bringing the requisite systems in house is not out of the question, the time, resources and personnel needed to successfully manage a multi-sourced data platform can be considerable. Not surprisingly, accessing a purpose-built, scalable, third-party solution set is widely seen as the most efficient and cost-effective route for asset managers and super funds.
In the coming years, we expect the greater adoption of artificial intelligence and machine learning to provide further opportunities to improve the way data is managed, so the sophistication of data management processes is proportionate to the importance of data in the organisation.
Growth in outsourcing
Investment operations must be run with agility, flexibility and responsiveness. As funds grow in size and complexity, the scale and ongoing investment requirement into systems and platforms may not be achievable under cost pressures.
In recent times, we have seen an acceleration in outsourcing decisions as large institutions that have traditionally kept most of their services in house have reached a tipping point, and custodians have a clear role to play in facilitating these services.
Asset managers are increasingly outsourcing to custodians, beyond pure custody and traditional fund administration services. Middle office functions in particular are a fertile area, given the complexity and cost of running operations (and fragmentation of Asia Pacific) such as post-trade and multi-custodian investment operations.
We have also seen greater take-up of outsourcing in specific areas. Activities such as collateral management, passive currency overlays, loan administration, investment analytics and private equity fund administration are now increasingly seen as viable and urgent areas to outsource to trusted custodians, some of whom can also bring investment bank and global expertise to bear.
As pressure continues to drive efficiency, asset managers and asset servicers are also looking to outsource their technological requirements through platforms such as Aladdin, a popular front to middle technology platform developed by BlackRock.
In 2020 BNP Paribas Securities Services partnered with BlackRock Solutions, becoming the first European custodian to join the Aladdin Provider community to deliver integrated end-to-end investment management capabilities to mutual clients. Through this alliance Aladdin equipped asset managers can fully leverage their investment platform functionalities while at the same bensefit from an outsourced investment operations set up.
Superannuation fund consolidation
In the superannuation space, the pace of mergers continues unabated. Drivers include regulatory pressure, an increased focus on member outcomes, fee pressure, the need to reduce costs and ensure rigorous risk management and governance.
Funds have been increasingly focused on cost cutting and critical size since the launch of the Australian Prudential Regulation Authority (APRA) MySuper Heatmap, which was launched at the beginning of 2020 to compare MySuper products across investment performance, fees and costs and member outcomes.
We expect to see more mergers and acquisitions in the coming years as scrutiny from regulators around member outcomes and efficiency continues. Many smaller funds are likely to be absorbed by their larger counterparts. These new ‘mega funds’ will have greater pricing power in the market, which is likely to put further pressure on the margins of fund and asset managers.
A focus on ESG
In addition, strong environmental, social and governance (ESG) credentials are no longer a ‘nice to have’ as ESG is increasingly integrated into investment decision-making and investors are expecting their superannuation funds to demonstrate their commitment on the ESG factors. A recent BNP Paribas ESG global survey found 90% of asset owners and asset managers predict that more than 25% of their funds will be allocated to ESG -in 2021.
There have been a number of key drivers of this change. Firstly, more investors are demanding ESG factors be taken into account. ESG is also becoming more of a focus for regulators. Sustainable finance disclosure regulation (SFDR), which introduces transparency requirements on financial products’ characteristics will go into effect on March 10, 2021 as an initial phase in the European Union. In Australia, APRA is now expecting fund managers to disclose clearer information around ESG risks and involvement. Other jurisdictions are expected to follow suit – the Monetary Authority of Singapore, for example, is currently steering the financial section towards a stroking sustainability focus. As a result, we believe many players will be seeking the assistance of partners as they navigate these changes.
More regulation on the horizon
The coming year will see more regulation for an industry that has already seen a raft of regulatory changes.
On the horizon is APRA’s Superannuation Data Transformation project, a multi-year project designed to make it easier to compare fund and product performance, particularly in the choice section of the market. This will have a direct impact to superannuation funds, with a knock-on effect to asset managers.
Mandated portfolio disclosure, which was part of the Stronger Super legislation and was originally tabled to start in 2016, is also set to move forward this year. The Australian Securities and Investments Commission (ASIC) recently announced that superannuation funds would be expected to disclose their portfolio holdings from 31 December 2021.
Super funds and managed investment product providers are also preparing the ASIC’s Regulatory Guide 97 (RG97), which sets out guidelines for the disclosure of fees and costs in product disclosure statements (PDS) for retail clients.
Another key change for 2021 is the commencement of CPS 226 Margining and Risk Mitigation for Non-Centrally Cleared Derivatives.
The industry will also continue its preparation for the European Commission’s Central Securities Depositaries Regulation (CSDR), which aims to address settlement fails and will implement cash penalties for failed transactions along with mandatory buy-in requirements. This change impacts both asset owners and managers that settle transactions in the Eurozone.
As a custodian, a key focus for BNP Paribas in 2021 will be on helping clients to navigate these changes and prepare accordingly.
What is clear is that the custody market is transforming as rapidly as the superannuation and asset managers it serves. We believe the sector is set to become even more important as the Australian financial services industry advances towards its next phase of growth.
BNP Paribas Securities Services is incorporated in France as a partnership limited by shares and is authorised and supervised by the European Central Bank (ECB), the ACPR (Autorité de Contrôle Prudentiel et de Résolution) and the AMF (Autorité des Marchés Financiers).
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