Digitalisation and Transfer Agency

Q. How is new technology changing the Transfer Agency function and how do you see this evolving in the next three to five years? Often classified as a threat to the Transfer Agency function, what opportunities does increased digitalisation present for the reinvention of the Transfer Agency function?

A. Investor set-up with the transfer agent is crucial in the asset management industry ensuring that all required taxation, anti-money laundering information is captured before any subscription money is received. However, Transfer Agents need to balance these obligations with investor experience and overall ease of doing business.

Increasing digitisation of transfer agency process will allow service providers to:

• Digitally collect information, and have user friendly means of providing the information to to create a level of intuitiveness and transparency, simplifying the process for both the asset manager and the end investor
• To scale the operation to a set of tightly controlled standards at the highest quality, and quickly react to any changing regulatory requirements, or changes in sanction regimes
• Ensuring full compliance to the local regulatory framework of the fund

Private Credit

Q. Private credit has been identified as a fast-growing area of opportunity for Ireland’s funds industry. What growth are you seeing in the private credit space and what services are being developed to cater for this area, and the wider private assets space?

A. Alternative investments into private markets (both debt and equity) and infrastructure have been the faster growing segments in the alternatives sector and one in which the demand for democratisation of investing is highest (i.e., the ability for retail investors to participate in such products); We expect the enhancements in ELTIF 2.0, combined with the Irish Limited Partnership to encourage growth in the space.

ETFs

Q. Global ETF assets broke through the previous high-water mark of $10.262 trillion, set at the end of 2021, on 15th June 2023 reaching $10.364 trillion according to figures compiled by consultancy ETFGI. What do you expect to be the dominant growth trends in the European ETF space in the coming 12 months?

A. The Global ETF market is currently receiving strong investor demand and continues to receive positive inflows after periods of market turbulence.

Globally, we expect active ETFs to be a growth driver for the sector, as pre-dominantly US based managers look to make their entrance to the ETF market. In Europe, ESG is dominating the inflows into the European ETF market, representing 65% of all inflows in 2022. We expect this to continue. The interest rate environment has created a positive environment for fixed income ETFs, driving inflows into ETFs in 2023.

Market Data

Q. The European Council and European Parliament have reached a provisional agreement on revisions to the Markets in Financial Instruments Regulation (MiFIR) and the Markets in Financial Instruments Directive II (MiFID II) which includes plans for a consolidated tape of market data, initially for equities and ETFs, and a general ban on ‘payment for order flow’. What is your view of the proposed revisions and their expected benefits for Europe’s asset management industry and broader capital markets?

A. The introduction of an EU consolidated tape, and the limiting of the PFOF, is a welcome development which will increase transparency of trading across the EU, potentially increase liquidity, and reduce costs to the end investor. Given that a lot of asset managers operate on a pan European basis, across the EU and the UK, alignment of the EU’s consolidated tape and the proposal being worked on by the FCA in the UK, would help improve efficiencies and outcomes for the end investor.

Tokenisation

Q. The tokenisation of existing asset classes is gaining traction, especially in private markets, and is seen as helping to reduce friction in the distribution of private funds. In what other areas are you seeing the use of tokenisation and where do you see the area of greatest potential for its application?

A. Tokenisation is gaining traction across the industry as asset managers across the full spectrum of asset classes. Some asset managers see tokenisation of asset classes as a mechanism to open up liquidity in private assets, whereas others see this as easing access of investors into funds, reducing settlement times, or reducing costs of intermediaries in the marketplace. We have heard of a wide range of managers entering test cases for how they would tokenise their fund offerings, and prepare themselves to be first movers in the next evolution of the fund landscape.

ESG standards

Q. Investors and industry bodies have called on the European Commission to uphold ‘the integrity and ambition’ of the European Sustainability Reporting Standards to maintain alignment with the Sustainable Finance Disclosure Regulation (SFDR). Any such failure, they say, would risk leaving asset managers without the ESG data required to make SFDR disclosures, adding further confusion for end investors and undermining the EU’s sustainable finance ambitions. As the years long wait for clearly defined ESG boundaries and definitions continues, how can asset managers’ and investors’ ESG investment goals be supported by the funds services industry?

A. Globally, sustainable investing is on the rise; a recent EY study found that 78% of investors want companies to focus on ESG activity. Our Global Wealth Management Survey showed that younger investors want investments that generate returns yet still contribute to society. Investor demand for ESG products is clearly to the fore, and asset managers have been responding to this demand, which a high volume of products being launched to cater for this demand.
In the EU, a patchwork quilt of regulations which overlap each other have been introduced, with SFDR targeted at Funds, CSRD at European Corporates, and the first IFRS® Sustainability Disclosure Standards recently being issued will see increasing levels of transparency in respect of sustainability disclosures.

Regulatory scrutiny of ESG-labelled products started to increase in 2022, with several of the industry’s global heavyweights facing investigations or receiving fines relating to accusations of greenwashing, which has continued into 2023.

As we move forward, we would expect would need to understand the impact of the changing regulatory environment as well as the expectations of their investors, and putting a robust control and reporting environment in place, enabling their investors to make informed decisions regarding ESG, while also preparing for regulator and investor expectations of assurance over these areas.

This article was first published in Finance Dublin.