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The approaching revolution in Europe's fund industry


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The approaching revolution in Europe's fund industry

  1. 1. Asset Management The approaching revolution in Europe’s fund industry Our view of upcoming infrastructure and distribution changes
  2. 2. Europe’s fund industry is on the brink of a change that will challenge many existing business models. New market infrastructure will make the industry’s value chain far more cost efficient and ease cross-border selling. And the combination of regulatory and market pressure is likely to make the retail distribution market steadily more competitive. Such changes will have an impact across the industry – from asset managers, to custodians, to distributors. For some they will create new opportunities; for others they will pose significant challenges.
  3. 3. Contents Page Introduction 01 T2S becomes a catalyst for consolidation 02 Pressures build for more open distribution 06 What the future might look like 08 Preparing for what lies ahead 09 Contacts 11
  4. 4. Introduction Europe’s fund industry is From a cost perspective, creation marketing from mid-2011, this will of the TARGET 2 Securities (T2S) intensify the fight for market share on the brink of a revolution Eurozone settlement hub from by opening national markets to the that will lead to greater 2013 will drive down the cost of most ambitious and agile players. efficiency, less cost and settling trades, and may lead to Across the EU’s fund industry, the a more open market. further consolidation among both central securities depositaries next 10 years will see nothing short (CSDs) and custodians. of a transformation. The number of participants in clearing and In distribution, regulators and market settlement will shrink, as they will participants alike are pushing for a in custody. Asset managers will more competitive market, in which find it easier to market their funds banks and other intermediaries sell across the EU, so creating greater investors the best funds available. competition. The direction of change At a time when the UCITS IV is clear – as is the fact there will directive will ease cross-border be both winners and losers. “BNY Mellon will be able to connect directly to T2S in future and we are now evaluating whether to do so market by market. In each country we are looking at the services our sub-custodian performs, and asking whether we can perform them ourselves. Some sub-custodians will be disintermediated and we will see a huge compression of margins – probably in the region of 60-80%. My guess is the number of banks active in sub-custody will diminish. A lot of the local players will disappear. Those that are regional players will survive and be the winners. If, for example, a Spanish sub-custodian decides to leave the market we may be able to enter that country, so T2S will bring opportunities.” Paul Bodart, Head Of Operations EMEA, BNY Mellon 1 The approaching revolution in Europe’s fund industry | PricewaterhouseCoopers
  5. 5. T2S becomes a catalyst for consolidation T2S is an IT platform The objective is to achieve than in the United States, with harmonised and commoditised cross-border settlement far more that will support CSDs delivery-versus-payment settlement expensive than settlement within by providing core, in central bank money in euros national borders. Furthermore, the borderless and not- (and possibly other currencies) cost of EU cross-border transactions for-profit settlement for most securities in Europe. is between two and six times more than domestic transactions. T2S services from 2013. By intensifying competition will drive costs down towards US among CSDs and enabling levels, with an estimated 90%1 regional custodians to bypass reduction in cross-border costs. sub-custodians, it is likely to become a catalyst for greater The system will settle both domestic consolidation. and cross-border transactions in euros but with the ability to settle T2S drives down costs in other major currencies at a later date. All securities currently settled T2S will provide core delivery- by existing CSDs will be eligible versus-payment settlement at far (including mutual funds, exchange- lower cost than is currently the traded funds, hedge funds, real case. Eurosystem, the euro area’s estate and pension funds). monetary authority which comprises the European Central Bank (ECB) The platform is a not-for-profit and the national central banks, plans organisation that will have a strong to have the T2S IT infrastructure corporate governance structure. up and running by 2013. This includes an advisory group comprising 42 representatives of According to the ECB, domestic the Eurozone’s national central settlement costs in Europe are banks, CSDs and commercial currently up to 10 times higher banks, plus advisers. 1 Source: Oxera, LSE, CEPS – presented by the ECB at the FESE convention in June 2007 // Draft working document on post-trading activities 23.05.2006. The approaching revolution in Europe’s fund industry | PricewaterhouseCoopers 2
  6. 6. T2S becomes a catalyst for consolidation continued... Introducing CSD Europe’s CSDs have been moving the three markets of Belgium, France cross-border competition towards closer integration for several and the Netherlands in January. The years, forming links with the two big new platform processes all fixed- Following introduction of T2S, clearing and settlement operators – income, equity and fund transactions CSDs will not only be able to handle Euroclear and Clearstream. In 2009, in multiple currencies on the same transactions within their home both Euroclear and Clearstream platform. Euroclear currently plans countries but also transactions from introduced clearing and settlement to add the remaining CSDs in its across Europe. Furthermore, the platforms covering several markets. network (UK, Sweden and Finland), actual process of settling will move In order to maximise efficiency, creating its so-called Single Platform. to T2S, meaning that CSDs cannot they have high degrees of process continue to charge so much for automation through straight- Clearstream, meanwhile, cross-border transactions. CSDs through processing. launched its Link Up Markets will start to compete with each other platform in April, which joined up and their profitability will suffer. Euroclear launched its ESES the national CSDs from Spain, (Euroclear Settlement of Euronext- Germany, Switzerland, Austria, zone Securities) platform covering Greece, Denmark and Norway. “There is today already a consolidation with the custody industry. The implementation of T2S will oblige global custodians to analyse their current models and consider the needs of local sub-custodians to access the local CSD for the settlement of the transactions. Nevertheless, as T2S only manages the settlement of transactions and not the custody aspect like corporate actions / events, the presence of local sub-custodians might be still necessary in the future. In this context, global custodians will have to analyse and review their business models.” Bruno Prigent, Deputy Head Of Securities Services, Société Générale 3 The approaching revolution in Europe’s fund industry | PricewaterhouseCoopers
  7. 7. T2S is likely to reduce the number of CSDs from the more than 20 currently in existence. With the settlement function moving to T2S, the remaining CSDs will compete and concentrate on functions such as management of corporate actions, securities lending, collateral management, calculation of fees, tax assistance, distribution, marketing of financial instruments data and reporting services. These activities are likely to bring them into competition with their custodian clients. Source: European Central Bank, Frankfurt am Main, Germany. The approaching revolution in Europe’s fund industry | PricewaterhouseCoopers 4
  8. 8. T2S becomes a catalyst for consolidation continued... Sub-custodians become Where regional / global custodians disintermediated decide they can handle all of the sub-custody functions within a For banks in the sub-custody country themselves, they are likely business, T2S poses a significant to end the sub-custody agreement. threat. By allowing all CSDs to At a time when banks’ profitability settle trades in securities from any is under pressure, and they are Eurozone country, the clearing and focusing more than ever on core settlement utility potentially allows businesses, some are likely to custodians to disintermediate exit the sub-custody business. their sub-custodians. Whether In these instances, the larger custodians can disintermediate regional and global custodians their sub-custodians will vary may well become consolidators, from one country to another. acquiring sub- custody businesses The large regional / global in order to enter new markets. custodians will need to see whether In addition to consolidation, the they can execute the functions custody sector as a whole faces currently carried out by sub- challenges that require considerable custodians in each country, and investment. These issues include whether they want to. They will demand for more transparency, need to consider functions such as more due diligence, more handling handling corporate announcements, of complex instruments and greater paying income, paying dividends, follow-up of corporate events. The processing tax claims and voting need for greater investment will, once shares at annual general meetings. again, increase the momentum for consolidation and greater scale. 5 The approaching revolution in Europe’s fund industry | PricewaterhouseCoopers
  9. 9. Pressures build for more open distribution For many years, the While banks have been promoting Distribution Review will ban financial the open architecture for some advisers from receiving commission competitiveness of fund years, many have still tended to payments from fund groups from distribution in Europe has sell primarily in-house products. 2012. Financial advisers will have been restricted by the Meanwhile, independent financial to charge for their advice instead, vertically integrated banking advisers have often been suspected so removing any commission bias. of selecting the products paying model, where banks Across the EU as a whole, the most commission. Now pressure is EC is proposing a packaged retail are manufacturers and building from a variety of sources investments products directive, distributors of funds. for change. designed to level the playing field between mutual funds and Regulations level the structured products. The EC is also playing field due to review the markets in financial instruments directive (MiFID) by New regulations are playing their November 2010, which would give part in this fundamental shift in it the opportunity to ensure that the the distribution paradigm. Most rules on inducements were imposed explicitly, in the UK the Retail more consistently across Europe. “The introduction of the Retail Distribution Review in the UK and the abolition of commissions will put the adviser firmly on the side of the client. It will increase the distinction between the providers with lower quality and higher quality product and further increase the concentration of flows. I think it will also draw a greater distinction between low cost passive management and alpha generation. If you are generating alpha you will be rewarded. If you are generating low volatility returns through good asset allocation you will be rewarded. If you are simply hugging the index then the adviser will look to access that index at as low a price as possible.” Gary Shaughnessy, Managing Director, UK DC and Retail, Fidelity International The approaching revolution in Europe’s fund industry | PricewaterhouseCoopers 6
  10. 10. Pressures build for more open distribution continued... These rules state that commission Steady move towards ‘open The prospect of mounting may only be paid if the objectivity of architecture’ competition advice is not jeopardised. Other developments are steadily For fund groups, a more open market At a time when UCITS IV is making opening up the European market. would also mean a more competitive it easier to market funds across Over time, banks have been market. The fund groups offering borders – mainly through the increasingly adopting open better value to investors would improved notification process, architecture, although the current prosper in such a market. They the management company harsh environment has slowed the would have an opportunity to build passport and master-feeder trend as some banks seek to protect market share across much of Europe. funds – regulatory change will profitability. In particular, private make the market far more open. banks are finding that their wealthy clients increasingly want the best Lobbying intensifies products on the market. And some of the large financial groups are Some of Europe’s large fund being forced to divest their non- groups and trade associations are core businesses, including in-house reportedly adding to the momentum fund groups. If a financial group no for change by lobbying the EC to longer owns a fund manager it is ensure that banks and financial far more likely to move to an open advisers are offering clients the most architecture fund distribution model. suitable products for their needs. Furthermore, fund platforms handle With the EC seeking to increase the a small but growing volume of cost efficiency of the fund industry fund business. These platforms and to promote investor choice, such are powerful distributors in the lobbying may be well received. Fund UK and are likely to become more distribution accounts for the single popular elsewhere. In Germany, biggest proportion of costs in the the stock exchanges are emerging fund industry – ranging from 46% of as fund distribution platforms, total costs in France to 75% in Italy.2 with Deutsche Börse offering more than 500 exchange-traded funds and 3,300 open-ended funds. 2 European Commission White paper on enhancing the single market framework for investment funds, 15.11.2006. 7 The approaching revolution in Europe’s fund industry | PricewaterhouseCoopers
  11. 11. What the future might look like During the next decade, Fund groups will find barriers to custodians. Furthermore, the distribution steadily fall and open vertically integrated banking / asset the shape of Europe’s architecture increases. The retail management model will come fund industry will change investor will start to get greater under pressure, with some banks significantly. The industry’s choice and more objective advice. choosing to sell their fund groups. value chain will become There will be opportunities for both Of course, in spite of the strides far simpler and more cost custodians and fund groups. The towards a more perfect single efficient, with greater large custodians will be able to market described in this paper, achieve still greater economies of there will always remain differences specialisation. scale and to enter new markets by between the EU’s national tax acquiring sub-custodians. Fund systems and market practices. Such groups will be able to distribute differences mean that achieving a more easily across the EU and truly seamless single fund market the best will win market share. may always be beyond reach. Not all parties will be winners. Yet the changes currently underway The number of CSDs is likely are bringing the EU closer to being to shrink, as is the number of a unified, efficient fund market. The approaching revolution in Europe’s fund industry | PricewaterhouseCoopers 8
  12. 12. Preparing for what lies ahead In order to prepare for Such are the intricacies of the business is facing such a wide range EU fund marketplace, and the of challenges that some groups tomorrow’s landscape, complexities of the different changes may wish to examine their entire it is necessary first to have taking place, that all parties in the models – from the guiding business a clear idea of what it will asset management value chain principles and business service look like, of its likely cost need to analyse carefully how they model at the highest level, down will be affected. When determining to specifics such as the required structure and of your firm’s their business goals, they need to processes and technical architecture. true points of difference. conduct holistic analyses that take into account confirmed changes to PricewaterhouseCoopers experts Only then can market can support asset managers and regulations and market infrastructure, participants decide whether as well as likely future changes and custodians by reviewing current it presents them with important trends, and the context of positions, defining blueprints of desired future states and providing opportunities or challenges. their existing business structures. guidance about how best to Fund groups seeking to market achieve desired objectives. more widely across the EU, for example, should consider the UCITS Such an exercise would IV directive’s potential, the custody analyse the following: infrastructure they need and possible • Current situation: where future distribution opportunities. They you are now might also want to consider gaining market access and economies • Future situation: what your market of scale through acquisition. may look like in three years’ time For custodians, only a careful • The road to follow: how to analysis of each market will reveal take the best road to avoid where it is possible to operate pitfalls and leverage on without sub-custodians. At the business opportunities same time, however, the custody 9 The approaching revolution in Europe’s fund industry | PricewaterhouseCoopers
  13. 13. Clients would then be able to • Reorganisation of custodial • Innovation in terms of new consider the following strategic service processes on either product distribution into a new options / business opportunities: a shared or utility basis. geographic area or distribution These centres of excellence model through a regulated market • Consolidation to gain can be located according to synergies and reduce cost business preferences – to take • Definition of a new distribution advantage of lower costs, model via a centralised global to ensure proximity to key custodian hub (with or without markets and to be close to sub-custodian network) pools of available talent and access via CSD to the T2S European platform The business service delivery model defines who the business partners The guiding principles set out how the (‘customers’) and stakeholders of the Guiding business blueprint will be defined, operated and custody business are and what service principles implemented they require Business service The interaction model depicts the The functional model outlines the model inter-relationships, dependencies and functions that will be required within the linkages between the custody business, custody business to deliver the services its business partners and other stakeholders Functional Interaction model model The processes are mapped, with Locations of the functions are controls embedded within the process determined within the context of the long with accompanying narrative sourcing decisions for the business Process Technical Governance & Location The technology and high-level data model architecture organisational model Roles and responsibilities are defined architecture are aligned to the service models within a clear organisational structure, delivery needs, the required STP which is overlaid with the governance levels and the interactions with various model for wider decision-making partners The approaching revolution in Europe’s fund industry | PricewaterhouseCoopers 10
  14. 14. Contacts If you like to discuss any of the areas covered in this paper or the implication on your business, please speak with your local PricewaterhouseCoopers contact or one of our T2S specialists listed below: Olivier Mortelmans Asset Management Advisory Leader, Europe, Middle East & Africa PricewaterhouseCoopers (Luxembourg) T: + 352 49 48 48 4012 E: Laurent Collet Steve Crosby PricewaterhouseCoopers (Luxembourg) PricewaterhouseCoopers (USA) T: + 352 49 48 48 4104 T: + 1 646 471 4875 E: E: Andrew O’Callaghan Sally Cosgrove PricewaterhouseCoopers (Ireland) PricewaterhouseCoopers (UK) T: + 353 1 792 6247 T: + 44 207 804 0669 E: E: 11 The approaching revolution in Europe’s fund industry | PricewaterhouseCoopers
  15. 15. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2009 PricewaterhouseCoopers. All rights reserved. ‘PricewaterhouseCoopers’ refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. Design by hamilton-brown: hb05346