Global outlook expands role of transfer agents

In the funds industry, the business of transfer agency has often been relegated to the lower end of the fund distribution value chain, with distribution and performance issues taking precedence.

There is no doubt however that although it might be underrated at times, transfer agency is indeed a critical function. Notably, as the European mutual funds industry goes global, the role of the transfer agent (TA) which has traditionally involved shareholder maintenance, transaction processing and reporting, has entered a new era and taken on new dimensions.

“Transfer Agency is one of the main differentiators in the fund industry today and we see more and more opportunities to provide added value services, especially in the fast growing third party cross-border fund distribution context,” notes Olivier Portenseigne, Head of Shareholder Services at RBC Dexia Investor Services Bank.

“Transfer agents are increasingly being asked to provide services beyond the standard TA functions,” remarks Josée Denis, global transfer agency product specialist at BNY

Mellon Asset Servicing. With the growth in global cross-border distribution of mutual funds, global distribution support is one of the main value add services that TAs are now expected to provide, she says.

“It is a key given today that TAs need to act as partners, handholding clients in their business development and global distribution strategy as they enter new geographies, and offer local expertise in these markets. Having the ability to provide distribution support is essential today if one wants to be a global player in the TA space.” BNY Mellon, she says, has five dedicated TA support hubs in Europe and Asia servicing approximately 140 fund groups and supporting over 60 countries of distribution worldwide.

Julien Cuminet, head of global transfer agency and retail at BNP Paribas Securities Services agrees. Distribution support has of late become essential, he says to give promoters the opportunity to be distributed locally, regionally and globally for different investors either retail or institutional.

“If you want to be a key global player on fund distribution, then you have to be present on both sides – at the promoter’s side to provide them core services and at the distributor’s side to provide value added services such as order routing, execution, settlement and negotiation and calculation of the trailer fees,” he says.

Mr Portenseigne says that RBC Dexia has a distribution support platform that targets both fund promoters and institutional investors including distributors, private/retail banks, insurance companies and fund supermarkets. “Transfer Agency and distribution support platform services are among the most visible products to the exter-nal world and hence are key elements in the value chain, bringing competitive advantage to asset managers in terms of operating model, managing complex products and supporting global distribution.”

The phenomenal growth in the global distribution of European investment funds has primarily been driven by the Ucits (Undertakings for Collective Investment in Transferable Securities) Directive, a set of EU wide rules that facilitate the cross-border offer of collective investment funds.

Consulting firm PricewaterhouseCoopers (PwC) estimates that, in 2007, almost 6000 Ucits funds were sold cross-border, with total registrations being around 50,000, a 60 per cent growth over 2005 and an over 100 per cent growth over 2002.

Moreover, with investors having globally accepted Ucits as providing high quality well regulated investment products with significant levels of investor protection, Ucits have gained in popularity beyond the European Union (EU) as well. PwC states that in 2007, apart from Europe, Ucits distribution was primarily focused on Asia and South America. These two regions along with Switzerland contributed to more than 40 per cent of total Ucits sales.

This rise in global Ucits distribution might have enabled transfer agents to expand the breadth of their service, but this trend has brought up its own issues, namely regarding the transfer agent’s ability to service customers across multiple jurisdictions. “The challenge in providing distribution support, is that services required differ from one country to another,” states Mr Cuminet of BNP Paribas.

The distribution models in the various regions differ vastly, which affects the respective reporting framework, adds Tony Klim, Emea CEO of Bravura Solutions, a global supplier of wealth management and transfer agency solutions.

Explaining some of the challenges of operating globally, Mr Klim says that “in the UK, distribution is largely through fund supermarkets and through independent financial advisors (IFAs), while in Europe and the Far East, fund distribution is through the banking infrastructure. For both these models, the reporting structure is different and that in turn impacts the TA solution.”

A key requirement for TA service providers is to have as best as possible, a single TA operating platform that can operate across multiple jurisdictions, says Ms Denis of BNY Mellon.

“We need to provide clients with a single platform that is multi-country and multi-currency enabled. The platform also needs to meet the regulatory and reporting requirements of multiple jurisdictions. Luxembourg domiciled funds, for example, are today distributed in 55 countries. So as a TA, we would have to be able to service 55 countries,” she explains.

Richard Barrett, Group Executive at IFDS (International Financial Data Services), the international transfer agency and joint venture between State Street Corporation and DST Systems, concurs. Untill a couple of years ago, he says, fund promoters viewed target markets from a local, siloed perspective. But this is no longer the case as, they are now taking a global approach thus requiring transfer agents to have the capability to be able to provide services across all the regions.

A changing world

“Keeping up with the sheer pace of change in the fund distribution space is challenging,” remarks Kelly Wilkie, director, TA Product and Head Emea at Citi Global Transaction Services. Initially the focus was on distributing products across the European Union, which over the past two years shifted to Asia and now the spotlight has moved to the Middle East.

“Our fund promoter clients look towards TAs as providing expertise as they enter new markets. This means that not only do we have to build local expertise in a very short time, the TA platform needs to continually evolve.”

Citi recently finalized an outsourcing agreement with Bravura for the provision of transfer agency technology services to Citi's Securities and Fund Services business in the European Region. As part of the agreement Bravura has acquired Citi's Warsaw-based transfer agency software platform, including its employees for $21m (E16.25m).

“The TA platform supports our operations in Dublin, Luxembourg and Hong Kong. This arrangement with Bravura will enable Citi to better meet evolving client needs relating to transfer agency services and distribution support,” says Ms Wilkie.

Commenting on the Citi-Bravura alliance, Bernard Hanratty, Managing Director, Head of Citi's Fund Services in Europe, the Middle East and Africa, says that the agreement would benefits all stakeholders.

“Given that the technology requirements in this market continue to increase in complexity, we are pleased to be working with a best-in-class technology and client support provider with a strong reputation for innovation and product development in the Transfer Agency field,” he says.

For Citi, this deal will result in reduced operating expenses while providing the long-term infrastructure to enable it to meet the growing geographic scope and sophistication of our clients distribution needs.

“Transfer agency is about scale at all levels,” says Mr Klim at Bravura. Bravura has around 250 employees focusing on the TA market and over 100 clients in the TA space. Recently the vendor worked with JP Morgan Asset Management to help streamline and consolidate its UK asset management product lines onto a single global transfer agency platform.

As such, transfer agents have been reasonably proactive in the area of technology adoption, automating not only their own operations, but also developing links with fund processing platforms. However, automation remains a key challenge for transfer agents since the overall automation level in European cross border fund processing space is rather low.

According to European think-tank group, Eurofi, only around 50 per cent of cross-border orders are automated in the European Union, mainly through relationships between large players and a progressive penetration of processing hubs, both supported by the Swift network.

The problem, says Eurofi, lies with low levels of automation among small and medium sized fund distributors.

Ms Denis at BNY Mellon suggests that the onus is on the small to medium fund distributors themselves who need to be educated and provided with adequate incentives and tools to automate the transaction process as opposed to using faxes.

However, “there is still a certain level of apathy among distributors regarding transaction processing automation initiatives” she says. She notes that initiatives such as Swifts’s Alliance Lite are a positive step for small to medium distributors to automate the transaction process. However, she notes that the industry is at a very early stage of marketing this tool so it remains to be seen how successful this initiative will be.

Comparing automation levels across Europe, Mr Barrett of IFDS says the biggest problem lies in the UK. “The UK is the least automated. In the UK, IFAs account for around 60 per cent of the distribution market, and often tend not use automation at all. Signed forms and cheques are the norm. In Germany too, the distributors are more inclined to use faxes,” he explains.

Automation levels are significantly higher in Luxembourg and Ireland, the main cross border funds markets in Europe. According to a recent transfer agency survey of the Irish market by the Irish Funds Industry Association (IFIA), the average percentage of straight through processing (STP) on cash settlement was recorded at 77 per cent. The survey revealed that a high percentage of companies have STP solutions in place for receipt of trades (67 per cent), processing of trades (63 per cent), confirmation of trades (50 per cent) and cash settlement (59 per cent).

Fragmented standards

It is important to note that while industry statistics might sometimes show a surprisingly high level of automation in the fund processing arena, these statistics should not be taken at face value. Several firms that have automated their internal processes often use proprietary standards, which create barriers in seamless communication.

Mr Barratt agrees: “Unlike the US funds industry, there isn’t a single standard such as the NSCC that everyone uses. In Europe, there is a plethora of standards being used, proprietary standards, Swift, EMXCo and others. As transfer agents we offer all methods of automation available but not everyone uses it.”

Industry bodies such as Efama, the representative association for the European investment management industry, have spent a lot of effort in developing standards for the fund processing environment, but the challenge lies in adoption.

To counter this issue, some transfer agents suggest that a regulatory mandate might be a way to make distributors adopt automation but others say that rather than regulation, the key is to incentivize distributors. “Fund distributors need to be made aware that costs will reduce when STP levels are high,” says Mr Cuminet at BNP Paribas. “This approach might actually work in increasing automation levels in the current economic climate where the focus in the funds industry has strongly moved to reducing costs.”

Josée Denis, BNY Mellon Asset Servicing