The Italian asset management community is well apprised of the risk management challenges it faces as a result of the incoming Bank of Italy rules relating to these firms’ governance structures, but it still has a long way to go before it is ready, according to a recent survey conducted by custodian bank RBC Dexia. The reforms, which come into effect at the end of this month, will require investment management arms of large groups to have independent control of their resources (including their risk management technology systems) and to conduct independent valuations of group financial products. When polled between March and April 2010, only a quarter (26%) of the 41 respondents said they were fully prepared to meet the new rules.
Paride Amiotti, managing director of RBC Dexia in Italy, reckons the Italian fund management community is going through profound changes due to the effects of the global financial crisis and extensive new regulation and a lot is required to get their houses in order. “The sector is at a turning point which calls for careful preparation and a renewed focus on risk management and transparency processes,” he says.
A turning point it may be, but the majority of asset managers in the country are not ready for the changes at the end of this month. Despite the looming implementation date, 42% of respondents said they had only just begun to assess the impact of the new guidelines, with only 27% indicating they had a good understanding of the requirements and implications of the measures.
Much like the other regulations sweeping the globe, the focus is on improving transparency within the asset management sector and, to this end, the rules also require these firms to appoint more independent non-executive directors on their boards and disclose potential conflicts of interest with their parent companies. Data transparency is once again the order of the day.
RBC Dexia contends that these new requirements, as well as wider European reforms, are likely to spur on a spate of outsourcing of the functions that these asset managers consider to be non-core. The majority of respondents, at 71%, indicated that they would consider such a move in order to alleviate the administrative burden.
Another side effect will be an increased focus on risk management and investment in data transparency: 64% indicated that they would be forced to improve their risk management and transparency processes. “The importance of risk management is further emphasised in that 59% agreed that new reform and regulation would drive asset managers to address risk issues more closely,” notes the survey. It cites UCITS IV and the Alternative Investment Fund Managers Directive (AIFM) as two examples of such European level regulation.
Some firms have even taken the initiative ahead of regulatory requirements, with roughly half having already strengthened their risk management processes this year. However, it is investor pressure rather than regulation that is at the heart of the drive to invest, with 68% citing pressure from investors for a safer approach to risk as the number one driver.
Asset managers said they were considering a number of options to reinforce their risk analysis, management and control systems, including increasing general investment in this area (37%), upgrading their IT and software tools (26%) and using third party service providers (21%). Great news for the vendor community in the Italian market.
Similarly, 69% of respondents declared that they intended to boost transparency in the next 12 months to provide clients with more detail on fund pricing structures and with greater comparison of the costs, risks and liquidity of their investments. However, the 31% that indicated they were not keen to improve transparency during the next year may be faced with a few surprises from the regulatory community, given its need to prove it has the teeth to back up its threats.
Those that are investing in transparency will be providing a greater insight into their pricing structures and more data around pricing; a trend that many other custodians have noted in the market. Data vendors will be heartened to hear that the value adds that they are working on will be put to good use; nearly every vendor in the market has been adding bells and whistles around their pricing services this year.
A minority, at 13%, are also considering an open architecture distribution approach to this data; something that EDM vendors may be keen to talk about with them.
Most of the respondents to the survey were from the asset management community (81%), with the others from private (16%) or retail banking (3%) sectors.