Understanding the regulatory landscape and the future of fund data exchange

Despite the impacts of the Covid-19 pandemic, both regulatory and data pressures have continued to impact the global investment fund industry throughout 2020 and 2021. With new regulations coming into effect this year and early next, and the ever-growing volume of fund data being required by the market, fund groups are responding in different ways to meet the challenges and grasp the opportunities presented.

In the first series of webinars hosted at the ‘Better Connected’ event, FE fundinfo’s inaugural virtual client conference, more than 600 industry professionals took part to discuss these issues and how regulation, reporting, increasing data requirements and solutions are impacting their businesses.

Realising the benefits of regulatory change

With ESG hitting the mainstream over the past 18 months, new regulations geared towards ethical investing, such as the Sustainable Finance Disclosure Regulation (SFDR) have come into effect. This presents both data and regulatory challenges to fund groups across Europe. At a time when many fund groups are continuing to grapple with the transition from UCITS KID reporting to the forthcoming PRIIPs regulation, the burden of regulation is ever-present. Added to this, the Cross-Border Distribution of Funds Directive and the corresponding regulation coming into force this year, while a consultation of the review of AIFMD has only recently finished.

Behind much of this regulation is an identified need for greater transparency within the industry. Mikkel Bates, FE fundinfo’s Regulatory Manager, said reporting and particularly communications from fund groups need to be “clear, fair and not misleading, which is particularly relevant in the context of SFDR, and whether funds marketed as ESG funds really are ESG, or simply putting a green spin on it.”

ESG has very much been at the centre of policymaker thinking over the past year and will only become more apparent throughout 2021. Regulators, Mikkel Bates added, have also been reviewing MiFID II delegated regulation to incorporate ESG: “as part of the action plan on sustainable finance developed back in 2018, regulators committed to including ESG into all relevant existing regulations, including the benchmarks regulation, UCITS, AIFMD and MiFID II. Within the MiFID II delegated regulation, the changes require when assessing the suitability of a product with an investor’s risk profile, an adviser must include ESG preferences a client may have without waiting for the client to raise the issue.” This, Mikkel warned, “will have a knock-on effect on fund groups, distributors and discretionary fund managers, as they will need to show how they factor ESG into their product governance process.”

Future of fund data exchange

Data has often been described as ‘the new oil’, and in the funds industry this has never rung truer as its importance continues to grow. Data and data exchange, its accuracy and quality affects both the ‘upstream’ (those fund groups who create and manage data) and the ‘downstream’ (banks, insurers and others) aspects of the industry who use it to market funds to the end investor.

There are two key issues dominating the exchange of fund data. Firstly, quantifying and responding to the pace in which data volumes are growing and secondly, the importance of identifying the key factors which are driving this expansion. Charlie Duffin, FE fundinfo’s Data Design & Definition Manager explained data – both regulatory and non-regulatory – is becoming increasingly challenging for fund groups of all sizes. “The trend you can see is one of rapid overall growth. Data quality, where small data errors can cause large knock on effects, is a big challenge. Data volume growth meanwhile, affects all industry participants to varying degrees, but in fund data, it is growing in several dimensions. The creation and implementation of any new fields represents a significant burden on IT and data teams. Particularly so for smaller companies, such as boutique asset managers where resources are more stretched.”

Regulations, as discussed in the first session in the Better Connected series, are a major driver in the requirements for new data. Research carried out by FE fundinfo’s data team found that since 2014, approximately 50% of new openfunds fields were created solely to comply with expanding regulation.

There are other dimensions of data growth which also need to be considered. Charlie Duffin said: “Every year, new funds, sub-funds, share classes are being added to the market all the time. For us, there are around 2,000 new share classes added each month, representing 10% growth each year.” Frequency of data publication also needs to be reviewed according to Charlie. “This is where some data tends to be updated increasingly frequently over time; our assumption is static data will be delivered four times more frequently over the next ten years. So data that is now monthly will move to weekly and quarterly data being published monthly.”

Data vendors are going to see the highest growth over the coming years, with some estimates putting a 40% rise year on year for certain organisations. This is largely because data vendors are the organisations who are dealing with the largest number of funds overall, as well as the most fund partners and the highest frequencies of data transmission. “We have to invest in better technology and standardisation in order to meet this demand,” Charlie said. “If participants don’t approach these improvements proactively, they risk using outdated systems which are unable to cope.”

Next sessions

FE fundinfo’s ‘Better Connected’ conference runs until 29 April. The final series of webinars will look at how fund groups can build their digital brands and include insight from Practical Futurist, multi-time TEDx speaker and former IBM Global Managing Partner Andrew Grill, who will provide practical and pragmatic advice on how to adapt to a new distributed way of marketing and selling.

Click here to register to Better Connected 2021.