Stephan Pouyat, global head of funds, ETFs and capital markets at Euroclear, said technology is key to fund managers reducing fees in a low rate environment, including innovations such as blockchain.
Pouyat said in a blog: “Blockchain has the potential to become a game-changer if it can deliver more secure and cheaper transactions that are currently possible. In this sense, it could represent massive disruption to current fund market participants.”
He continued that automation in the funds industry has not matched the adoption of technology amongst banks, so the buyside is still saddled with costs that could easily be avoided due to the large large amount of manual procedures.
“A large proportion of investment firms’ back office staff are involved in manually chasing up who has done what, when and to whom, and this is a costly business for which the end investor tends to pick up the bill,” he said.
Pouyat added that some automation has taken place such as Euroclear’s Fundsplace for straight-through-processing in order processing, settlement and asset servicing over the last 15 years.
“A move to an STP model would echo the US experience of 1986, when automated funds processing was introduced by the DTCC,” he said. “With greater automation, institutional investors in Europe could not only pay less for their investments, but could also use their funds holdings more flexibly, pledging them as collateral, for instance. The re-registration of fund portfolios – currently a complex, time-consuming manual business – will become much faster and could take place intra-day.”
He continued that potential development of blockchain and creation of smart contracts could bring many benefits, despite some current challenges, such as the need for smart contracts to be legally enforceable.
“Just as there are share classes that focus on certain investors or confer certain rights, so share classes could be created that rely on blockchains,” said Pouyat.”The technology could reach critical mass over time as other investment firms realise its potential and opt to share existing blockchain ledgers.”
He added that the evidence for the usefulness of blockchain is gaining momentum and Euroclear has launched a new French industry working group which aims to develop and enhance the distribution of funds to both domestic and foreign investors and examine how to use new technologies.
Pouyat said: “The funds industry is rarely at the forefront of technical and technological change. However, with the withdrawal of banks from some capital markets activities, it increasingly falls to investment firms to drive capital markets and, equally, drive capital markets technology. The industry cannot afford to wait before it starts thinking about what that means for its business models and strategies.”
In spring this year the the European Banking Authority mapped financial services offered and innovations applied by fintech firms in the European Union and their regulatory treatment.
In a discussion paper published last week on its approach to financial technology the regulator said: “Fintech innovations may potentially pose a threat to financial stability, due to, for example, disintermediation of regulated institutions or activities, or the deep IT interdependencies between market players and market infrastructure.”
The paper estimated there are more than 1,500 fintech firms in the EU, particularly in payments, clearing and settlement services. The number is likely to be significantly higher as many fall outside current regulations. The EBA said: “The high percentage of fintech firms not subject to any regulatory regime could suggest a need for further analysis of the activities of such firms.”
In addition, the EBA said this would allow them to further assess if there are any regulatory arbitrage or uncovered consumer protection risks.
“Competent authorities reported that investments in fintech are anticipated to grow in the coming years, in particular as regulatory changes at the EU level are expected to support or facilitate the development of FinTech, for instance PSD2 brings within its remit two new types of payment services (account information services and payment initiation services), and as some jurisdictions are continuing to introduce policies such as regulatory sandboxing regimes and innovation hubs,” said the EBA.
Sandboxing regimes, innovation hubs or similar regimes are in place in almost half of the jurisdictions to allow fintech firms to test products and services under regulatory approval in order to encourage innovation while protecting consumers and maintaining a healthy and stable financial system.
The eligibility criteria for sandboxes differ across the EU and the regulator said it may need to undertake further work to assess the merits of harmonising the assessment of applications.
The EBA’s consultation lasts until 6 November and the regulator will assess the responses before deciding what steps to take next year.