Luxembourg-based François-Kim Hugé is a partner at Deloitte, running fund registration services. In a recent interview with Kurtosys, he empathises with the conflicting pressures facing asset managers in order to remain competitive, scrutinises the role of global industry regulators and urges the funds industry to pick up its pace of digital progress to better meet the demands of the next generation of investors.
What do you see as the hardest challenges facing asset managers today?
The ongoing challenge for the asset management industry is to cope with multiple and high priority objectives all at the same time. For instance, it has to prioritise innovation while having to cope with regulatory obligations, which add to costs in a context where the pressure to reduce such costs is high.
These objectives are all equally high priority yet they go in diverging directions; asset managers need to innovate but that puts pressure on costs, which they need to reduce. They need to comply with regulations, but then that captivates much of your capacity with regard to innovation programmes, which are also costly. While these are conflicting objectives, this is what the journey is all about.
What is the one thing asset managers must do in order to cope with that challenge?
The option that does not exist is to stand still and the one thing they have to do is embrace change.
Many have been coping with regulation while industrialising their operations but it cannot go on like this – it needs more.
In the past few years, a number of developments have taken off that relate to innovation. Lately, we observe a trend towards improving the client experience, but there is further to go.
There is a clear demand from the market for innovation and the ability to innovate will distinguish the winners from the losers.
Are there any issues facing Luxembourg funds where lessons can be applied from other jurisdictions?
One key issue we face in Luxembourg is about attracting talent, and this is especially true for technology. Luxembourg is hardly seen as the Silicon Valley of Europe, although there are many advantages to working here. We have a very progressive scene for start-ups and our fintech sector is particularly active, especially given the size of the country. But we need to promote the country better in order to attract the right talents to boost our local asset management industry.
In which areas of the asset management space do you see the most room for complete overhaul, or genuinely fresh thinking?
One key area is certainly about the user experience (UX). The majority of the asset managers’ websites are still very traditional and probably have been the same for years. We are starting to see developments in this space but change is taking place very slowly. When you look at the level of digitalisation in asset management versus retail banking, they seem to be very far ahead and there is a lot of catching up to do.
We see great opportunities in terms of providing better information and advice, the online digital experience – whether via the websites or mobile apps, online marketing tools and dynamic or real-time factsheets but the adoption rate is still relatively low.
That said, we need to keep in mind that asset management is relatively young and that may explain why it may appear as fairly immature in certain ways: the fund universe in Luxembourg was only really launched with the UCITS directive in the late 1980s. Banking has been around much longer so is a more mature sector in terms of its processes and ways of dealing with clients.
Added to that, the asset management industry has been focused on its own growth and its industrialisation. At first it was not about the customer experience, but rather how to provide the funds with the best possible performance. This has been the case for years and many asset managers today still focus on how well their fund has performed at the expense of other objectives that certainly merit more attention.
From a regulatory perspective, what could asset managers do differently to comply in a more effective manner?
I see great opportunities in the compliance and regulatory areas because much of the current processes still rely on traditional means. Many new solutions exist; the so-called ‘regtech’ to expedite and improve speed and efficiency. Moreover, such solutions can also significantly impact the qualitative perspective of compliance work.
Take the duty for overseeing delegated functions, consisting in overseeing hundreds of counterparties. Asset managers have to collect all those documents manually, rate them and consolidate the results. That process still relies on traditional means – Word, Excel, emails and other ‘classic’ systems – to issue, follow up and process the due diligence questionnaires. This is very outdated.
The new tools provide new possibilities to transform and improve the process and giving options to distributors to fill in the questionnaire online using a centralised system. The asset managers can follow the progress made in real time, the completion rate of questionnaires is higher because the system helps the respondents in filling them in. Finally, such systems allow asset managers to leverage and analyse the collected data in ways never seen before.
Do you see asset managers continuing the trend to outsourcing certain aspects of their marketing and communications platforms?
Absolutely, given all the obligations that keep accumulating and being imposed on asset managers – mostly driven by regulation – I don’t see them being able to cope with all the non-core activities.
One trend I see across the industry is the growing number of activities being outsourced. Another is about combining services with central providers, or ‘one-stop shops’, because it simplifies the oversight process and improves efficiency and inevitably results in better financials. At the end of the day, it makes sense that asset managers concentrate their capabilities on those activities that they do best and limit the energy they spend on non-core processes.
Do you think the regulator has enough of an understanding as to the role of technology within asset management?
Yes. My view is that regulators understand that there are numerous questions in relation to technology – for instance around blockchain, smart contracts and cryptocurrencies. They understand there is a lot of potential development in such areas, but they still don’t know for sure how to deal with that; they still don’t know if they need to accompany such movements or be more prudent. However, in line with the market, they are trying to understand whether these are just marketing-led ‘buzz words’ or real developments that will be genuinely groundbreaking and could benefit the people – the end investors.
But they are getting involved and want to be part of the innovation movement; for instance, they understand very well the criticality of data management and privacy issues – which is crucial for everyone as illustrated recently with the Cambridge Analytica scandal. They have a crucial role to regulate the way data is being used because you can’t count on the market, so they need to police that.
With regard to guidance, they need to keep up with the changes, accompanying and working with the market participants to set up the most appropriate framework. Judging by my observations of consultation papers issued by regulators and other concrete actions launched by them, such as sandboxes, there is a willingness to do so. Actually, I see many active regulators playing a very active role as they want to establish the most competitive environment to foster such innovation.
Beyond financial services, are there other sectors from which we can learn, with regard to digital transformation?
The real push for digitisation in asset management does not come from the inside but from social developments. Soon, all investors will be digital natives, with high expectations for the new world we live in. Social networking, great online experiences using apps rather than websites and ditching paper, for example.
Take the traditional factsheet – I believe this document is quasi-obsolete. Not even just for the younger generation, but even for mine and that of my parents, the rigid PDF is a thing of the past. Everyone around me is using tablets and mobile phones to retrieve all information they need about anything. Hence, it is essential for asset managers to rework the client experience of their website to accommodate such needs.
It’s not just happening in the retail space but also the B2B market. For instance, up to today, the interactions between asset managers and their distributors are not highly data-driven, limiting the possibilities to understand the dynamics between various stakeholders of the fund business.
We do see changes in this regard with the strengthening of data exchanges, as recently highlighted by the latest regulatory developments, such as Packaged Retail and Insurance-based Investment Products (PRIIPs) and Markets in Financial Instruments Directive (MiFID). Asset managers must now communicate about their funds in the form of an EPT (European PRIIPS Template) or an EMT (European MiFID Template). Asset managers will soon need to get to feedback from distributors on fund flows and target market. Such data-driven developments certainly constitute a game changer.