Regulation Further Propels Asset Managers towards Digital Transformation

Asset managers today are faced with an overwhelming quantity of data. The paradox for many managers is that as the avalanche grows, clients and regulators are increasingly keen to look at the data on a much more granular level than in the past. Faced with these dual challenges and competing priorities, institutions are increasingly turning to data service experts to help them cope. Some managers turn to external third-party providers to ensure that they maintain oversight and control of their data in a transparent manner. And asset servicers, who are already close to the business and know the ins and outs, can perform many of these functions, replacing outdated operational processes and spreadsheets with more fit for purpose digital solutions.

For many asset managers, digital transformation often starts in regulatory and compliance areas given how dependent these functions are on data processing. This has sparked a veritable revolution in regulatory technology (RegTech): the firms who can harness these new technologies, and deploy data efficiently, stand to benefit the most.   

RegTech revolution

RegTech solutions are a growing part of the asset management ecosystem. Deloitte divides the concept of RegTech into five categories, all of which are familiar to global asset managers and their service providers: (1) regulatory reporting, (2) risk management, (3) transaction monitoring, (4) identity management, and (5) control and compliance. Each area provides challenges and opportunities for asset managers when they are managed through a strategic plan around data aggregation, data governance, and data supply. 

There are important subgroups within these categories: within transaction monitoring, for example, there is now an emerging field of technology devoted to behavioral analytics that helps firms monitor conduct and better understand why a person made a certain trade or decision. This can assist not just with ensuring regulatory compliance but also better efficiency and decision making across a firm.

And since today’s regulatory data trove is so vast — spoken of in terms of exabytes, which are the data equivalent of 340 trillion of those Ariana Grande songs on your cellphone — it stands to reason that firms will be devoting significantly more resources to monitoring and managing data than they are today. Artificial intelligence and machine learning tools offer potential solutions, especially when deployed to streamline many of the rote functions (like manual form entry) demanded by regulators. Asset managers are also using these technological advancements in the front of the house, digging into investment decisions to ensure that portfolio managers are in an appropriate state of mind when those buy/sell/hold decisions are made. It is a fusion of human and machine interaction leading to better decision making and outcomes. There is no longer a debate as to whether human or machine are better or worse, but rather how data and machines can augment human intellect and expertise. 

Alternatives increase demands for data

One of the drivers of the increased demand for data and digital solutions is the growth trajectory of alternative investments in asset management. Previously when asset managers predominantly invested in listed equities, it was fairly straight-forward to compile the required data sets about public companies from exchanges. But now that investment firms are moving toward more alternative asset classes managers have a much harder time complying with regulatory demands for company information. In addition to the mandatory regulatory data disclosures, the modern-day investor demands much more nitty-gritty on the firms in an investment portfolio, so granular data on underlying investments, much of which resides in “unstructured data sets,” are increasingly important.

At this time most of the data used for analytical review and regulatory reporting is historical and focused on past trades. However, looking into the not too distant future, it is likely that asset managers will look for more real time or predictive outcomes, answering such questions as “What if I do this?” or “If I was going to invest in that, what would be the legal and compliance consequences?” Predicative and preventative analytics to help boost returns and reduce risk, errors, and compliance breaches will become the asset management norm before long.

Legislation increases data needs

In the US and Europe, new legislation also has vastly increased the demands on asset managers as to how they protect and share data. The EU’s General Data Protection Regulation (GDPR) alone is estimated to have cost firms $9 billion to implement, not to mention trade transparency reporting requirements from MiFID II, AIFMD, and SEC Liquidity and Reporting Modernization.

With these increased data requirements for asset managers, brings the question of how to secure and house all this data. As managers put more data into outsourced cloud providers, regulators are starting to look at these providers as a possible area of vulnerability. A critical sub-set of the wider regulatory focus on outsourcing, cloud hosting venues are seen as a special concern as the data they contain can be significant in terms of both volume and market criticality/sensitivity. The CSSF in Luxembourg has already set out expectations on the use of cloud. It is likely other regulators will follow suit.

Regulations lacking

So far, there have not been any integrated and comprehensive regulation prescribed for the application of emerging technology such as artificial intelligence, blockchain, and digital authentication and signature protocols. There have  been specific administrative rulings and high level policy statements, but in fact, regulators themselves are looking for guidance on how to proceed. There is a fine balance between over regulating nascent technology which could stifle growth and innovation, and not having rules in place at all which could risk leaving certain activities which require oversight unregulated. 

In the case of data as a resource, its very nature is challenging, precisely because it is not always tangible and concrete. Data often sits in multiple systems, may be unstructured, or hidden within a vast reservoir of other data. Global regulators are pushing asset managers and their data providers to make data available in near real time about their operational processes, trading activity, or other parameters. Asset managers generally maintain full regulatory responsibility even when they decide to outsource regulatory reporting or data provision to a third party. It’s critical that the outsourced data provider can deliver the same level of transparency and security as the asset manager itself.

With the growth and pace of data provisioning only accelerating, it is sure that regulatory scrutiny around the use of data, data security, and oversight of any outsourced data vendors will increase in focus in the coming months and years ahead. In a nutshell, every global asset manager must ask themselves a simple question: What is my data strategy?

This article was written by BBH Senior Vice President Simone Vroegop. Simone is the Head of European Product Management, Financial Technology. She works with asset managers and financial institutions to develop and deliver FinTech-led solutions to future proof their business.