A firm working in fields such as helping financial organisations with data management said this key - if seemingly dry - subject will become a C-level priority for investment and wealth managers this year.

Investment houses around the world face continued cost pressures from regulations, while one of the top challenges is bringing data under one roof to win efficiency savings and keep pace with rapidly moving markets, a recent report states.

The asset management sector is on the “verge of a data management revolution in 2016”, argues Confluence, a firm working with the sector on information management challenges. With compliance costs in Europe, North America and other regions running into billions of dollars, the prize for handling data efficiently is high.

“Our industry has already gone through a transformation sparked by regulatory concerns with managing both systemic and liquidity risk, and that focus has left firms responsible for far more data than ever before," Todd Moyer, executive vice president, global business development at Confluence, said in a recent statement. “In 2016, we predict the asset management industry will see streamlining and optimizing their data management processes as a way to reduce risk, manage cost and create new business opportunities,” he said.

Confluence predicts that data management reform will be a top-level executive item this year; it also warns of “chronic regulatory fatigue” will endure, and expects that lower institutional tolerance for self-administered private equity firms will boost the trend for back-office outsourcing.

Regulators around the world are forcing firms to change how they handle data. For example, a “modernisation” proposal from the US Securities and Exchange Commission - expected to be finalised in early 2016 - will affect 9,000 advisors to separately managed accounts and 13,000 mutual funds. (The SEC wants to gather more data from investment firms.) In Europe, new AIFMD [Alternative Investment Fund Managers Directive] reporting affects a larger number of fund managers because the regime is being expanded to non-EU jurisdictions. Solvency II, an insurance regulation, will create additional reporting burdens for asset managers from 2016.  

“In relation to organising data to comply with specific regulations there are some indicators of the global cost to the industry. The US SEC cost-benefit analysis has suggested that the total industry cost spent completing the required forms for its modernisation proposals will be $550 million in the first year, followed by $445 million the year after,” Moyer told this publication when asked about specific details.

“Likewise, the European Commission has estimated the initial costs of the forthcoming MiFID II [regulations] implementation to be between €512 million ($552 million) and €732 million. The ongoing cost of compliance is estimated to be between the range of €300 million and €580 million, he continued.

Among other points made by Confluence in its report, it said that outdated and manual data management processes in the back office will increasingly be viewed as a liability and cost to the firm. 
 

Private equity 
The report notes that private equity has surged as an asset class in recent years, investors such as pension funds and other organisations insist on more transparency and control. As a result, Confluence says that in 2016 there will be more pressure on private equity firms to outsource their back-office work. A large driver of this demand has been the Bernard Madoff Ponzi scandal, highlighting the risk of self-administered funds.

Asked why the data fragmentation issue is so serious, Moyer gave an example: “The information required on a specific hedge fund that is reported on Form PF is also reported for that same hedge fund on Annex IV, is included in that fund’s audited financial statements, and is included in Form ADV both individually and in some aggregations. In a similar fashion, the information that will be reported on Form N-PORT may also be included in Form CPO-PQR, as well as in that fund’s annual report, the fund’s fact sheets, the fund’s prospectus, and aggregated in Form ADV. The problem comes from redundancy.  If the same data is used four times for four different purposes, it must be sourced four times, loaded four times, scrubbed four times, and the information must be reconciled to ensure it is consistently reported. This creates a huge load of work that adds no value to regulators, advisors, or investors.”

“In addition, data fragmentation can create challenges preparing for new regulations and responding to regulatory change.  For a large systemic risk report like OPERA, Form PF, or Annex IV, it can take 12 months to source the data, and if your data is fragmented, you would need three separate 12 month initiatives,” he said, adding: “With a single store of data and a single data model, once you have done the setup work once, say for Form PF, you can immediately use it for Annex IV as well with little to no additional work and without another 12 month data sourcing project.”  

“At Confluence, we have created an updated data management system and in 2016 we are working to integrate it across the breadth of our solutions that utilize that data to solve that problem, eliminate redundancy, and deliver that value,” he said.

Asked which countries are better advanced at dealing with such issues, Moyer said: “Across both the US and EU asset management industry we have not witnessed much of a divergence in the maturity (or lack of) of data management processes across region, geography or firm size. 

“Solving this [data] problem will mitigate the regulatory overhead inflicted on asset managers and asset servicers, allowing greater competition and greater innovation, which will have a positive impact on the investors who ultimately purchase their investment products. Ultimately the focus is efficiency in order to eliminate redundancy, which will reduce the burden created by regulation,” Moyer said. 

The recent pattern of weak returns – and now surging volatility – does not really change the urgency of the data management problem, Moyer said. “Rather, the stakes were raised by the shift in regulatory focus since 2008 towards systemic risk management. That change in focus significantly increased the data management burden.  As an example, a set of financial statements (the high end data management challenge pre-2008) required 6 to 8 source data files.  A systemic risk regulatory filing like Annex IV requires between 20 and 30 source data files,” he added.